Text similarity in analyst reports and stock price synchronization

Abstract

Security analysts play key information intermediary roles in the capital market, and their analysis may reveal firm-specific facts that can enhance pricing efficiency. Using analyst research reports on listed Chinese companies, we empirically examine how text (dis)similarity among the reports written about a target company affects the company’s stock price synchronization. We perform such textual analysis on the premise that text (dis)similarity can measure the degree of incremental information in research reports. The results show a significant positive relationship between text similarity and price synchronization, a conclusion that holds after a series of robustness tests. The effect becomes more prominent with higher information asymmetry between firms and investors, more influential analyst reports, and better analysts’ ability to obtain new information. The mechanism lies in attention. As text similarity decreases, more analysts pay attention to the target company, incentivizing it to make more public announcements, which causes stock price synchronization to decrease. Our findings highlight a need for information diversity in the research analyst industry.