Do security analysts follow
diversified firms?
Empirical analysis based on behavioral
decision-making process
Weixing Cai
School of Economics and Management,
Tsinghua University, Beijing, China, and
Cheng Zeng
Manchester Business School,
The University of Manchester, Manchester, UK
Abstract
Purpose – By using data on China’s security market, this paper aims to examine the relationship between
corporate diversification and security analyst following in terms of behavioral decision-making process.
Design/methodology/approach – This is an empirical study.
Findings – The results show that the numbers of analysts covering a firm are negatively associated
with the firms level of diversification. As the lines of business of firms increase, the cost of analysts’
acquiring information will accordingly go up, forcing security analysts to give up following such
firms. A further study finds that the firms with related diversification are more likely to be followed by
analysts than those with irrelevant diversification, because the related lines that make information and
analysis technique generally used could reduce the cost of security analysts.
Originality/value – Extant studies focus too narrowly on statistical properties of the forecasting or
market reaction to the analyst reports. However, this paper examines the association between
corporate diversification and analysts following by looking at the economic incentives that affect
analysts’ decisions. Moreover, this paper contributes to the literature on security analysts in China.
Keywords China, Securities markets, Financial analysis, Diversification
Paper type Research paper
1. Introduction
Security analysts are specialized groups that perform financial analysis on the security
markets. As a major information intermediary between listed firms and investors,
security analysts have been an integral part of the capital markets. Their main function
is to provide external or internal clients with research reports on listed firms, including
earnings forecasts, price targets or buy-sell recommendations. By using their specialty
knowledge and skills, security analysts are able to collect and analyze amount of
information from corporate insiders, and subsequently disseminate information to
The current issue and full text archive of this journal is available at
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The authors appreciate the comments from Professor Minghua Gao (Beijing Normal University),
the anonymous referees and the participants of 4th International Corporate Governance Forum
in Nankai University.
This is an authorised translated version (from the Mandarin) of the following paper: Cai, W.
and Zeng C. (2010), “Research on the impact of diversification on security analysis: an empirical
analysis based on behavioral decision-making process”, Nankai Business Review, Vol 13 No 4,
pp. 125-133.
NBRI
2,1
64
Received 4 January 2010
Revised 3 August 2010
Accepted 22 October 2010
Nankai Business Review
International
Vol. 2 No. 1, 2011
pp. 64-78
q Emerald Group Publishing Limited
2040-8749
DOI 10.1108/20408741111113501