Information And Investment Value In Analyst Selective Following

The analyst's ability to predict the company's future performance is an important issue for investors who make decisions based on analyst research reports.So far,most of the evidence about analysts' forecasting ability is based on earnings forecasts and investment advice from them.This article also examines the forecasting capabilities of analyst information.Unlike previous literature,which focuses on earnings forecasts and investment ratings,we focus on analyst's selective following of listed companies.Analysts' coverage decision is actually a kind of resource allocation behavior under resource constraints.There is a conflict of interest in the incentives they face.In addition to recommending good investment targets for investors to gain reputation and wealth,they also need to cater to institutional and investment banking clients.They will avoid following companies with potential "bad news" and pay more attention to companies with "good news".When analysts on market face similar incentives,companies that analysts believe will have better prospects will get more analysts to follow than companies with poorer prospects.We use the number of research reports published by the securities analysts during a certain observation period as the proxy variable for the analysts' selective following,which contains information on the analysts' positive expectations of the company's performance.In this study,we develop a regression model to extract expected return information from standard analyst coverage data of CSI 300 companies which is publicly available.We measure abnormal analyst coverage for each firm by removing the component of coverage attributable to observable firm characteristics such as the firm's size,turnover and past performance.Our research find that abnormal analyst coverage has significant predictive power for both levels and changes in firms'fundamental performance.This result suggests analysts can anticipate firms'subsequently earnings and allocate abnormally high attention to firms with better fundamental performance.The strategy based on abnormal coverage is implemented at the end of each calendar month t and held in month t+1 by ranking firms into 5 deciles of abnormal coverage and taking a long(short)position in firms within the highest(lowest)decile.This strategy yields an average raw return of 1.24%per month on a value-weighted basis.The 4-factor-adjusted and 3-factor-adjusted alphas are 1.27%and 1.26%respectively,showing that abnormal coverage convey expected return information which has investment value.Additionally,the predictive power remains significant when controlling for other asset pricing factors such as firms' size,turnover,return reversals and announcement premia.The investment value of abnormal coverage stems from that analysts can forecast firms' subsequently fundamental performance,also may partly from the subsequent increase of share-holding proportion of institutional investors.This paper examines the content and investment value of the analysts' selective following information.We construct feasible investment strategies and explore the sources of investment value,which is meaningful for understanding the role of analysts in China securities market.