Private information acquisition and stock evaluation by Chinese financial analysts (2012)

This study draws upon empirical qualitative research of Chinese financial analysts to examine how they improve their information comprehension through private information search in a specific institutional context and use such information to evaluate company value. Despite working in state-owned institutions, Chinese financial analysts claim that their analytical framework is similar to their counterparty in the Western setting. However, our results indicate that Chinese analyst's analytical practice is considerably influenced by the specific characteristics of the Chinese listed company. We find that Chinese financial analysts use public available information and privately available information to mutually verify the truthfulness of each source. Specifically, we find that private meetings are regarded as a 'value added' information source providing pricesensitive information including product cost structure and possible assets injection from the listed company principle shareholders. Introduction China has the largest and one of the fastest growing economies in the world. However, its equity markets are still at an early stage of development, with informational asymmetry (Groenewold et al., 2003). Fama (1991) defined the efficiency of stock market as the ability of the market to rapidly digest new information so that securities' prices would at every point in time incorporate this information. Financial analysts are the main information intermediaries responsible for speeding up the information flow and reducing the information asymmetry between listed companies and investors. Studying information usage and search channels and decision-making processes in share appraisal improves the level of understanding of investment analysis. Previous research indicates that information sources have a significant impact on analyst's information comprehension, analysing abilities and job quality. Specifically, analysts tend to exhibit greater information comprehension and better job quality or performance when they have more access to a firm's indirect information and conduct more company-level surveys (Hu et al., 2008). It also is suggested that analyst performance is influenced by country-specific factors including the size and activity of the country's equity market, national professional requirements and the presence and absence of large international brokerage and investment firms (Moyes et al., 2001). Detailed survey-based investigation of Chinese financial analysts is a under researched area. This paper aims to contribute to research and provides insights into both institutional and individual investors and how institutional characteristics in China influence financial analyst's information search and decision-making process, and specifically: 1. What information do financial analysts search in private meeting withs listed companies? 2. How do they use the information collected in their decision-making process? The reminder of this paper is organised into five sections. Section 2 covers a brief literature review of research into financial analyst's information sources and their decision-making process. Section 3 provides relevant contextual insights into the Chinese financial market, listed companies and financial analysts. The data collection and research method are presented in Section 4. Section 5 discusses the survey results, and finally Section 6 concludes the study with implications of the findings and suggestions for future research. Review of Research into Financial Analysts' Information Sources and Stock Selection Process A great deal of empirical research at the disaggregated level aims to study the behaviour of investment analysts focusing on exploring human information processing and the decision-making process (e.g. Arnold and Moizer, 1984; Pike et al., 1993; Barker, 1998). Research at the disaggregated level explaining how market participants actually use all sorts of information, especially accounting information, in the decision making process. …