Accuracy of the Qualitative Reports of Financial Analysts: A Chinese Study

Article excerpt

This study investigates Chinese analysts' original opinions and forecast performance in their qualitative research reports. We find that Chinese analysts possess certain analytical capacity, but that their opinions are seldom original. Specifically, we find that Chinese analysts tend to use more evidential accounting information and sophisticated financial analysis methods when making "negative" conclusions for specific company performance. But we do not find any significant differences in the type of information and the financial analysis method used when they analyze "failure" versus "non-failure" companies. For the forecast performance, our results show that Chinese analysts' qualitative report conclusions have significantly positive correlations with a company's next year's EPS and core operating revenue growth.

I. Introduction

This paper investigates the qualitative research reports made by Chinese financial analysts in two aspects - original opinions and forecast performance; these are two measures for an analyst's analytical capacity. An original opinion means analysts can have their own views, rather than simply following others. They can point out questions and find hidden troubles in "good" companies, or explore potentialities in "bad" companies. These kinds of original views are the main distinction between analysts and ordinary investors.

China established the Shanghai Stock Exchange in December 1990 and the Shenzhen Stock Exchange in July 1991. It has approximately a total of 1,400 firms listed in these two stock exchanges. Therefore, the Chinese financial analyst profession is still in the early development stage. The objective of this exploratory study is to investigate Chinese financial analysts' original opinions and forecast performance in their qualitative research reports.

Western analysts usually provide concrete data for the next period of expected EPS or accounting earnings. But Chinese analysts seldom make such kind of predictions (Hu et al., 2003). Therefore, it is difficult to investigate Chinese analysts' forecasts and their performance directly. In this paper, we use articles on Chinese newspapers as sources of data for archives study and adopt analysts' qualitative report conclusions as a proxy for the forecast performance to study the analytical capacity and behavior of Chinese financial analysts. This use of alternative data sources is a major contribution of our work to the literature.

Generally speaking, analysts' performance is measured by their forecast accuracy; stock picks ability, quality of research reports or customer service. While in theoretical research such measures as forecast accuracy (Clement, 1999), frequency to overperform consensus forecasts (Butler and Saraoglu, 1999) and profitability of stock recommendation (Womack, 1996) are frequently used. The data in these literatures are mostly from I/B/E/S. However we cannot obtain these kinds of data directly in China for a large sample because it only includes about 10% of listing company data. In addition to public financial data from Chinese listed companies, our other data are collected by hand mainly from analysts' research reports. We gather the information that analysts often pay attention to, analysis methods that analysts use and conclusions they make, etc. To test whether Chinese analysts have their original opinions, we develop several hypotheses, such as whether they would analyze companies according to their characteristics, and whether they would come to their conclusions independently from auditors' opinions. Then, we synthesize all of the above-mentioned results and judge whether Chinese analysts have original opinions. Finally, we use multivariate regressions to analyze the association of analysts' conclusions and firms' actual financial performance one year later to observe their forecast performance.

In this exploratory study, we find that Chinese analysts possess certain analytical capacity, but that their opinions are seldom original, because we do not find significant differences among using different financial analysis methods and collecting different types of information for "failure" versus "non-failure" companies. …

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