How Guanxi between Financial Analysts and Mutual Fund Managers Cloak Financial Gains in China

An article based on a study by The Chinese University of Hong Kong (CUHK) Business School researchers has recently been published in Nikkei Asian Review, an English-language business journal owned and run by the Japanese media group Nikkei Inc. The study investigates the benefits that equity analysts receive when they publish positive opinions about certain stocks, as well as the financial gains that fund managers get in return. The article was contributed by George Yang, Associate Professor of School of Accountancy at CUHK Business School, upon the invitation of the prestigious business publication.

Prof. Yang originally penned a working paper titled “Friends in Need are Friends Indeed: An Analysis of Social Ties between Financial Analysts and Mutual Fund Managers,” in collaboration with Zhaoyang Gu, Professor and Director of School of Accountancy at CUHK Business School, and Guangqing Li at China Galaxy Securities Co., Ltd., as well as Prof. Zengquan Li, Dean of the School of Accountancy at Shanghai University of Finance and Economics.

In the article, Prof. Yang states that fund managers in China exploit their guanxi with analysts to achieve favourable analyses of the stocks they hold within a portfolio, which in turn encourages a boost in the values of their portfolios and directly augments their personal fortunes.

“Some 1,200 funds in China managed by 70 mutual fund companies are periodically ranked on performance based on the stock prices in their portfolios. The rankings are pivotal in winning new investors, which in turn dictates the income of fund managers and their promotion chances. So the higher the value of [the] portfolios, the more income fund managers receive,” Prof. Yang writes in his article.

Prof. Yang found two ways in which fund managers pay back favors from analysts. First, they tend to cast their “star analyst” votes for the analysts with whom they have the closest connections. In fact, they play a crucial role in determining which analysts get this recognition, which can in turn bring analysts an immediate boost in publicity and a dramatic rise in income. Another way for fund managers to return the favor is to allocate more trading through their preferred analysts’ brokerage firms. As commission fees from institutional investors are the main source of revenue for analysts, those who are socially connected to fund managers are more likely to receive commission payments from the latter’s companies.

“Such social relationships can significantly distort market efficiency for investors, especially the smaller, individual investors who make up the bulk of the Chinese stock market and who are relatively unsophisticated when it comes to acquiring financial information and making investment decisions,” Prof. Yang warns in his article… Read More (PDF)

Prof. Yang’s research paper was first featured on the school’s China Business Knowledge (CBK) website in a feature article titled “Friends in Need are Friends Indeed – How Friendships Cloak Financial Gain in China.” The Marketing and Communications Office at CUHK Business School also distributed the article to more than 11,084 distribution points in the United States and over 21 countries in Asia Pacific. It has been widely picked up by the media around the world, with 50 clippings generated so far. The campaign has also successfully drawn media attention on the research such as BBC, South China Morning Post and more. Publications that have picked up the story include Bloomberg News, Yahoo! Finance, Sina, Registration Asia, Riau One (Indonesia) and more.

Source: Nikkei Asian Review
Date published: 20 May, 2016