CAN INVESTORS PROFIT BY FOLLOWING ANALYSTS’ RECOMMENDATIONS? AN INVESTIGATION OF CHINESE ANALYSTS’ TRADING RECOMMENDATIONS ON INDUSTRY
CAN INVESTORS PROFIT BY FOLLOWING ANALYSTS’ RECOMMENDATIONS? AN INVESTIGATION OF CHINESE ANALYSTS’ TRADING RECOMMENDATIONS ON INDUSTRY

Summary/Abstract: This study empirically examines the investment value of security analysts’ industry-specific trading recommendations on China’s stock market. Two questions are raised: whether investors can profit from the Chinese stock market by following those analyst recommendations; and whether buying (or selling) those recommended stocks could yield a higher return than the market during the same period of time. We conduct this research based on the database from EASTMONEY, which is the most frequently visited website providing professional information regarding market performance and share trading issues in China. We examined the trading history of the market from 2011 to 2013, and identified a total of 32440 recommendations issued by professional Chinese brokerage houses regarding 44 industries. Calendarbased portfolios are set up to evaluate the performance of those industries one day, one week, one month, half a year, and a year after the trading recommendations were released. It is found that industries with favorable recommendations in general outperform those with unfavorable recommendations and this performance discrepancy tends to magnify over time. If following the analysts’ recommendations to buy and sell, shareholders are likely to profit in the mid- to long-run, and those stocks pertain to an industry with favorable (unfavorable) recommendations tend to outperform (underperform) the benchmark indices in the mid- to long-run as well. This study provides a novel attempt to assess the characteristics, and to an extent, the institutional efficiency of the share market in the world’s largest developing country from an industry-specific perspective.

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