Do Foreign Investors Crowd Out Sell-Side Analysts? Evidence from China

Abstract

This study examines whether foreign investors affect the information production of analysts. Based on China’s stock market, we find that foreign investors significantly reduce analysts' coverage. Such negative association is more pronounced in firms with a high level of governance and information disclosure and varies with analyst characteristics. Further tests suggest that as foreign investors crowd out analysts, the number of research reports and brokerage' site visit fell, but analyst forecast accuracy improved, indicating that the demand and supply of information are generally in equilibrium. We further address the endogeneity issue using a quasi-natural experiment, the “Shanghai-Hong Kong Stock Connect”, and the results still hold. Overall, our results present evidence of potential information production by foreign investors, providing policy implications and highlighting the positive effect of China’s open-door policy in capital markets.