“The source of local analysts’ information advantage or superior forecast accuracy compared with foreign analysts is at least partially a result of the local analysts’ political knowledge,” he says.
This can explain the information advantages, in terms of forecast accuracy, that local analysts working for domestic brokerages have over foreign analysts in China.
“More importantly, we found that local analysts’ superior forecast accuracy is significantly greater when their analyst reports contain more political topics.
“To corroborate our evidence that political knowledge can explain local analysts’ information advantage, we found stronger results among state-owned firms and firms with government subsidies,” he adds. “This suggests that the political knowledge gives local analysts more information advantage when analyzing firms that are more political.”
“However, when the firms’ overseas sales were ranked in the top 5 per cent of sample, the foreign analysts were more accurate than those of local analysts.
“The foreign analysts’ superior accuracy grew greater as their reports contained more topics relating to the financial and profitability ratios of the firms.”
Future Research
Prof. Zhang says useful research in future could focus on how local analysts in China obtain such institutional knowledge.
Another related topic could be identifying more local institutional knowledge in other emerging economies using topical analysis.
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