The information content of analyst recommendation revisions — Evidence from the Chinese stock market

The Chinese stock market has witnessed a dramatic increase of analyst coverage over the past years. While analyst revisions clearly exhibit optimistic biases, we find significant market reactions to both upgrades and downgrades. However, in contrast to findings in existing literature for other markets, our results show that market reactions to downgrades are generally weaker than to upgrades in the Chinese stock market. We examine two hypotheses, one related to short-sale restriction and the other to the behavior of individual investors, and show that the latter is a more plausible explanation of relatively weaker market reactions to downgrades in the Chinese stock market. Finally, we show that the added value of revisions cannot be entirely credited to a small group of “lead” analysts. Our study adds to the literature with findings on the role of analysts in emerging stock markets of unique institutional settings.