Do security analysts follow
Empirical analysis based on behavioral
School of Economics and Management,
Tsinghua University, Beijing, China, and
Manchester Business School,
The University of Manchester, Manchester, UK
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
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
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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,
Received 4 January 2010
Revised 3 August 2010
Accepted 22 October 2010
Nankai Business Review
Vol. 2 No. 1, 2011
q Emerald Group Publishing Limited