Abstract:

Despite that Chinese financial analyst industry has grown rapidly in a short period of time， it still faces challenges by investors to the validity of analyst reports. One possible reason is that investors cannot effectively distinguish and understand the multiple types of information provided in analyst reports. There are two most important and commonly used types of information in analyst reports： earnings forecasts and stock recommendations， which have different implications for investors. While existing research mainly focuses on only one type of information， it attempts to take two types of information together and understand their differences from investors’ perspective through theoretical analysis and examination of the economic consequences of these two types of information in a unified framework. To be more specific， it looks into how investors react to analysts’earnings forecast revision and change in stock recommendation using data of A-share listed companies in China during 2006-2018.It is found that analysts' recommendation changes have greater information contents than their earnings forecast revisions. Analysts' earnings forecast revisions can provide incremental information beyond the recommendation changes. However， market reactions to earnings forecast revisions vary when directions of recommendation changes are different. In the short window， investors react more strongly to earnings forecast revisions when there is ‘bad news’ （downgrade in recommendation）. While， in the long window， investors react more strongly to earnings forecast revisions when there is ‘good news’ （upgrade in recommendation）. The above results have several implications： （1） investors pay more attention to the more understandable information （recommendation changes） between earnings forecast and recommendations due to their limited attention； （2） investors' market reactions to earnings forecast revisions change along with the direction of recommendation changes； （3） Limited investor attention behavior exists in the short term and is corrected in the long term.It contributes to existing literature by taking analyst earning forecast revision and change in stock recommendation in one unified framework. The findings of this paper facilitate a comprehensive understanding on the role of the two basic types of information provided in analysts' reports in Chinese capital market， to some extent respond to the concerns of investors on the validity of analysts’ reports， as well as help investors understand and use securities analysts' reports in a proper way.

Key words: analyst report, earnings forecast, stock recommendation, limited attention, market reaction