| Security analysts, is a special group in China’s capital market, whose main responsibility is to collect and analyze information related to listed companies, and make relating forecasts on earnings and value, in order to meet the requirements of the investors on relevant information from the listed companies. In western developed capital markets, security analysts have decades of development history, while China’s security analysts industry started relatively late, which taking place in the early 1990s. However, with the rapid development of capital market, China’s security analysts industry has experienced a "pundits" to "industry experts" transformation. Now, as important information intermediaries, security analysts play a dual role as information interpreters and transmitters, and contribute a lot to the capital market. Their earnings forecasts and investment rating of listed companies has become an important basis for investor decision-making process, and guide the rational allocation of market resources to a certain extent.However, served as market information intermediary, security analysts are not perfect yet. Recently security analysts received a variety of criticism as well as getting mixed comments from the market. The main cause of this phenomenon is twofold:First, it comes from interest conflicts from different aspects; Second, it comes from the limited ability of security analysts themselves. Compared to western developed capital markets, China’s security industry analysts, are still in their infancy, which mainly appears that rules and regulations are not perfect, operational capacity differs a lot and interest conflicts is getting worse. Research on relevant interest conflicts related important, but the unevenness of analyst ability is the key that restricts the development of analysts industry. However, industry expertise is the important manifestation of the analyst ability. As an outstanding analyst, one must be an expert in related industry, with relevant industry expertise as well. However, from the "Finance Weekly" systematic evaluation conducted in 2011, in terms of industry analysts, the proportion of outstanding ones in the market is very low. More than half of the market stocks still do not meet predicted price target by analysts after six months when the report was released. Therefore, in the long term, the improvement of industry expertise is the primary task for the development of analyst industry.This paper mainly studies around industry expertise, with utilization of existing theory and data to make deeper analysis and testing. In detail, we reveal the formation mechanism and economic consequences of analyst industry expertise from both aspects of theoretical analysis and empirical test.The main contents and conclusions of this paper are as follows:1. According to the efficient market hypothesis, asymmetric information theory, the theory of learning by doing, economies of scale theory and industrial organization theory, we make the analysis of theoretical foundation of analyst industry expertise from the perspective of both demand and supply forming a theoretical framework for analyst industry expertise. The theoretical framework above studies the relationship among structure, behavior and performance with market demand factors added with industrial organization theory at the core. This paper argues that the market structure of analyst in certain industry and the behavior of cultivating analyst industry expertise will achieve a higher quality of analyst research reports. Improved the quality of the study can increase market demand, thus contributing to the continued development of the industry analyst expertise. The efficient market hypothesis and the theory of the role of information asymmetry increasing the market demand for high-quality research reports, because high quality research reports must be able to mitigate the degree of information asymmetry in the market and promote market efficiency, it can be perceived by the market. The theory of learning by doing and economies of scale theory has a direct impact on the formation of the analyst’s industry expertise.2. By reviewing the development process of the analyst industry and describing its status quo, we find that China’s analyst industry is still in its infancy coupled with a lot of problems. Among them, the analyst conflicts of interest and their lack of ability are the main causes of the much-maligned industry analyst. It is believed that external factors such as conflict of interest compared to the analyst is the key to their lack of ability to restrict the development of industry analysts. Industry expertise served as an important manifestation of the ability of analysts, should attract attention from both academics and practitioners.3. Based on the statistics and deep analysis of analyst ratings in our country, this paper constructs two sets of long-short portfolio strategies, according to analysts’ consensus ratings and rating changes in the industry, in order to test whether analysts in China have industry expertise. The study shows that in a serious conflict of interest of the capital market situation, analysts rate the stock with a optimism trend, change in stock rating is more valuable than the stock rating itself; according to rating changes to build a portfolio can achieve significant excess earnings, shows that our industry stock analyst can identify "good" and "bad", on the whole with industry expertise. However, it is also found that, although analysts have industry expertise of the whole, but the overall level of industry expertise is not high, which is mainly reflected in the excess return on the portfolio is relatively small. Of course, it is directly affected by the difference between individual analysts. In order to distinguish between individual analyst industry expertise level, this paper constructs three indicators to measure analyst industry expertise namely industry share, industry attention and industry experience.4. Based on analysts forecast data from 2007 to 2012 of China’s A-share listed companies, this paper examined the impact of analyst industry expertise on its predictive accuracy. The results showed that industry analysts do have a positive impact on the expertise of its predictive accuracy. Specifically, the lower the cost, the higher level of industry expertise analysts gather information, and they interpret the information processing capacity of the stronger, and therefore more accurate forecasts. It is also found that the quality of information disclosure of listed companies on the relationship between the two played a regulatory role. Information disclosure quality analysts predict a major role in the process of using different information, low quality of information disclosure prompting analysts to predict related industries gather more information, and therefore, this process reflects the differences in the level of industry expertise analyst. Conversely, high quality information disclosure weakened the analyst’s reliance on industry expertise.5. Based on analysts forecast data from 2007 to 2012 of China’s A-share listed companies, this paper examined the impact of the innovation of analyst forecast revisions on market reaction. On this basis, we make further investigation of the influence of industry expertise on the relationship above. The results show that, the quality of analyst forecast revisions has a positive impact on the market reaction, innovation and industry expertise can reflect the quality of analyst forecast revisions. Specifically, analysts revise forecasts and market innovative response positively correlated, that innovation is higher, the market reacted strongly. The innovative is subdivided into good news and bad news, good news can cause high innovation market reaction, the bad news is highly innovative accompanied with negative market response, and low innovation in between. We also find that analyst industry expertise will further affect these relationships. Analysts industry expertise mainly affect investors on revising their forecasts to determine the quality and credibility. That compared to other analysts, have a high level of industry expertise and innovative analysts make amendments to arouse the attention of investors, leading to more intense market reaction.The possible innovations of this paper are as follows:First, according to the efficient market hypothesis, asymmetric information theory, the theory of learning by doing and economies of scale theory and industrial organization theory, this paper makes the analysis of theoretical foundation of analyst industry expertise from the perspective of both demand and supply, which forms a theoretical framework for analyst industry expertise. Second, the use of three methods to measure analysts industry expertise, in addition to drawing Jacob et al. (1999) proposed by the industry share, it had also put forward innovative industry attention and industry experience. Third, the use of empirical methods examines the impact of analyst forecast accuracy of their industry expertise, and on this basis, further study of the impact on quality of information disclosure of listed companies on the relationship between expertise and industry analysts forecast accuracy for analysis normal how to use information from different levels to provide direct evidence, but also for information transfer between industry provides indirect evidence. Fourth, this paper examined the impact of industry expertise on market reaction, offering a new decision-making basis for market investors.
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