Do Investor Preferences Affect Analyst Research? Evidence from Chinese Dual-Listed Shares

Abstract

We examine whether financial analysts cater to investors’ preferences and beliefs when crafting their analyst reports. We use a unique feature of the Chinese market – firms whose shares are dual-listed on a Chinese exchange (A-shares) as well as on the Hong Kong stock exchange (H-shares). We rely on the segmented nature of these two markets – that A-shares are primarily traded by Chinese investors while H-shares are traded by foreign investors – as well as the assumption that Chinese and foreign investors have divergent preferences and beliefs. We examine differences in the content, tone, and recommendations of analyst reports for A-shares relative to H-shares within the same firm-month. We also examine differences in analyst reports written in Chinese versus English, within the same share market. Results are consistent with analysts crafting their reports to match investor preferences and beliefs. Overall, this paper presents evidence supporting a catering theory for analyst research.