Do foreign investors crowd out sell‐side analysts? Evidence from China

Abstract

This paper examines whether foreign investors (FIs) affect the information production of analysts. Based on China's stock market, we find that FIs significantly reduce analysts' coverage. Such negative association is more pronounced in firms with a high level of governance and information disclosure and varies with analyst characteristics. We also identify two possible economic mechanisms: the information channel and the governance channel. Further tests suggest that as FIs crowd out analysts, the number of research reports and brokerage site visits decreased, but analyst forecast accuracy improved, indicating that the demand and supply of information are generally in equilibrium. We further address the endogeneity issue using a change-on-change analysis and a quasi-natural experiment, the Shanghai-Hong Kong Stock Connect (S-HKSC), and the results still hold. Overall, our results present evidence of potential information production by FIs, providing policy implications and highlighting the positive effect of China's open-door policy in capital markets.

The price impact of analyst revisions and the state of the economy: Evidence around the world

“…Overall, although analyst strategies are profitable in good times worldwide after controlling for market and common risk factors, as shown in Subsection 4.2, these profits either disappear or at least decline substantially after adjusting for their predictability based on these lagged macroeconomic risk variables. Thus, our results indicate a reduced information production role played by sell-side analysts in recent decades (see also Altinkiliç et al, 2016;Cheng et al, 2022), with no support for Hypothesis 2a or 2b, while suggesting that time-varying expected returns may be as a plausible driver of the profitability of analyst strategies around the world.…”