Do Analysts Cater to Investor Beliefs? Evidence from Market Liberalization in China

57 Pages Posted: 11 Jun 2021 Last revised: 25 Jun 2021

See all articles by Dawn A. Matsumoto

Dawn A. Matsumoto

University of Washington - Department of Accounting

Jenny Li Zhang

University of British Columbia - Sauder School of Business

Yuxiang Zheng

University of British Columbia, Sauder School of Business

Date Written: June 3, 2021

Abstract

We examine whether financial analysts cater to investors’ beliefs, using the market liberalization (Stock Connect) programs in China as a shock to investor beliefs. We find that analysts become less optimistic in their recommendations following the introduction of less optimistic investors through the Stock Connect programs. In addition, catering theory predicts that when investors hold heterogeneous beliefs, analysts tend to segment the market and slant toward extreme positions in order to attract target investors. Consistent with this prediction, we find that analyst dispersion increases in the post period. Moreover, analysts with buy or strong buy (sell or underperform) recommendations of a given firm become more optimistic (pessimistic) in their research report tone. Finally, we show that in updating their earnings forecasts, analysts are more (less) responsive to earnings surprises that are consistent (inconsistent) with their stock recommendations. Overall, this paper presents evidence supporting a catering theory for analyst bias.

Keywords: Catering Theory, Financial Analyst Bias, Stock Recommendations, Market Liberalization

JEL Classification: M41, G02

Suggested Citation

Matsumoto, Dawn and Zhang, Jenny Li and Zheng, Yuxiang, Do Analysts Cater to Investor Beliefs? Evidence from Market Liberalization in China (June 3, 2021). Available at SSRN: https://ssrn.com/abstract=3864534 or http://dx.doi.org/10.2139/ssrn.3864534

Dawn Matsumoto

University of Washington - Department of Accounting ( email )

224 Mackenzie Hall, Box 353200
Seattle, WA 98195-3200
United States
206-543-4454 (Phone)
206-685-9392 (Fax)

Jenny Li Zhang (Contact Author)

University of British Columbia - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada

Yuxiang Zheng

University of British Columbia, Sauder School of Business ( email )

Vancouver
Canada

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