Do security analysts follow diversified firms? Empirical analysis based on behavioral decision‐making process

Abstract

Purpose

By using data on China's security market, this paper aims to examine the relationship between corporate diversification and security analyst following in terms of behavioral decision‐making process.

Design/methodology/approach

This is an empirical study.

Findings

The results show that the numbers of analysts covering a firm are negatively associated with the firms level of diversification. As the lines of business of firms increase, the cost of analysts' acquiring information will accordingly go up, forcing security analysts to give up following such firms. A further study finds that the firms with related diversification are more likely to be followed by analysts than those with irrelevant diversification, because the related lines that make information and analysis technique generally used could reduce the cost of security analysts.

Originality/value

Extant studies focus too narrowly on statistical properties of the forecasting or market reaction to the analyst reports. However, this paper examines the association between corporate diversification and analysts following by looking at the economic incentives that affect analysts' decisions. Moreover, this paper contributes to the literature on security analysts in China.

Citation

Cai, W. and Zeng, C. (2011), "Do security analysts follow diversified firms? Empirical analysis based on behavioral decision‐making process", Nankai Business Review International, Vol. 2 No. 1, pp. 64-78. https://doi.org/10.1108/20408741111113501