Does Foreign Investor Demand for Information Affect Forecast Accuracy? Evidence from the Chinese Stock Markets

Abstract

Prior international accounting studies have examined mainly the supply side of analyst research. Specific trading rights and financial reporting systems in China provide a unique opportunity to test both demand and supply factors of analyst information. For shares traded only by less-informed foreign investors, the increased information demand may create incentives for analysts to exert greater efforts than for shares traded by local investors. This study provides evidence that analyst effort (proxied by analyst coverage) and expertise (proxied by consensus cross-analyst forecast variability) affect forecast accuracy more significantly for shares traded by foreign investors than for shares traded by local investors. Additionally, I find that the relation between analyst characteristics and relative forecast accuracy is stronger for shares traded by the foreign investors. The findings are consistent with analysts responding to demands for information by less-informed investors.

Keywords: Analysts Respond to Investor Demand for Information, Forecast Accuracy, Relative Forecast Accuracy, Analyst Effort, Foreign Investor Clienteles

JEL Classification: M41, G15