Do Foreign Investors Crowd Out Sell-Side Analysts? Evidence from China

43 Pages Posted: 23 May 2021

See all articles by Dongmin Kong

Dongmin Kong

Department of Finance, Huazhong University of Science and Technology; School of Finance, Zhongnan University of Economics and Law

Qi Tang

Huazhong University of Science and Technology

Xinwei Zheng

Department of Finance

Date Written: May 18, 2021

Abstract

This study examines whether foreign investors affect the information production of analysts. Based on China’s stock market, we find that foreign investors 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. Further tests suggest that as foreign investors crowd out analysts, the number of research reports and brokerage' site visit fell, 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 quasi-natural experiment, the “Shanghai-Hong Kong Stock Connect”, and the results still hold. Overall, our results present evidence of potential information production by foreign investors, providing policy implications and highlighting the positive effect of China’s open-door policy in capital markets.

Keywords: Foreign investors; Analyst coverage; Information disclosure; Corporate governance.

Suggested Citation

Kong, Dongmin and Tang, Qi and Zheng, Xinwei, Do Foreign Investors Crowd Out Sell-Side Analysts? Evidence from China (May 18, 2021). Available at SSRN: https://ssrn.com/abstract=3848623 or http://dx.doi.org/10.2139/ssrn.3848623

Dongmin Kong (Contact Author)

Department of Finance, Huazhong University of Science and Technology ( email )

Wuhan, Hubei 430074
China

School of Finance, Zhongnan University of Economics and Law ( email )

Wuhan, Hubei 430073
China

Qi Tang

Huazhong University of Science and Technology ( email )

1037 Luoyu Road
Wuhan, Hubei 430074
China

Xinwei Zheng

Department of Finance ( email )

221 Burwood Highway
Burwood, Victoria 3125
Australia

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