Empirical Research About Reliability Of Securities Analyst’s Earning Forecast Based On GEM

With the developing of the Chinese security market and maturing of Chinese investors, investment decisions are made increasingly based on analysing the value of company rather than technical analysis. However, ordinary investors could not effectively analyse all the listed companies due to lack of information and analysis capacity. And securities analysts are professional in obtaining and analysing different information from listed companies. Therefore, securities analysts play a key role in dealing with and delivering useful information from listed companies to ordinary investors. Among all the information, earning forecast is one of the most important information for analysing the value of the company. Hence, earning forecast is one of the most favourite research topics about security market.The principle of being useful to decision-making leads to usefulness of accounting information. Many empirical studies, in foreign countries, have proved that securities analysts can provide useful information about earnings forecasts. And the usefulness of earning prediction directly relates to the help to investors and the accuracy of analysts’ forecasting. Therefore, for the purpose of ensuring the usefulness of accounting information, the most important thing is to ensure the reliability of accounting information. This means to ensure the accuracy of the information of securities analysts’ profit forecast. In China, due to development gap of capital market between China and the western countries, it is rare to find test about reliability and usefulness of information relating to securities analysts’ profit prediction. Reliability is seen as premise of usefulness in Chinese GAAP, so the reliability of securities analysts’ earning forecast is the theme of this research. And the usefulness of it will be tested when reliability is met to some extend. In order to make a more effective test about the reliability of securities analysts’ prediction, samples are collected from the GEM (Growth Enterprises Market) board. This is because the risk of listed companies in GEM board will increase the difficulty of securities analysts prediction. On the other hand, when making decision about these companies, investors are more reliant on the reliability of the earning forecast. And the usefulness of information is more important. Due to the above, the author finally determined to research the reliability of analysts’earning prediction based on the data from the GEM board.The theoretical basis of this dissertation is the weak-form efficient-market hypothesis, the asymmetric information theory and the usefulness of accounting information. And this research is also done based on the domestic and foreign relevant research. In this dissertation, the reliability of earning prediction is tested, which is followed by the testing of the usefulness.This dissertation is divided into five parts.The first chapter is introduction. This chapter focuses on research background, worth of this research, research methods and ideas. Also, that information of earning forecast increasingly concerns investors along with the development of the Chinese securities market is mentioned. And in this chapter, three types of earning forecast information are introduced:earning forecast of securities analysts, earning forecast from management authorities and earning forecast based on the statistical model. The following part introduces development condition of Chinese securities analysts and the risk of listing on the GEM board.Literature review is the second chapter. Literatures, from China and other countries, about securities analysts’profit forecast are reviewed and compared. It is found gap appears comparing research in China and that in other countries. This is because the lag of development of Chinese security market makes securities analysts a new industry and lack of the support based on relevant data.The third chapter is about relevant concepts and theoretical basis. The first part of this chapter is the summary of the definitions and relevant issues of profit forecast information and securities analysts. And then current industry conditions of the securities analysts are summarised. The specific characters of listed companies on the GEM board are introduced in the following part. At last, the theoretic basis which is made by the efficient-market hypothesis, the asymmetric information theory and the usefulness of accounting information is mentioned.The fourth chapter is the empirical test of securities analysts’earning forecast. The hypothesis of this dissertation is the weak-form efficient market. And then the sample and design of this study are explained.146sample companies are selected to be tested. The empirical test is divided into two steps. At first the reliability of securities analysts’earning forecast is tested. After testing, it is found that85%of profit forecast are reliable. And60%of them deviate less than20%comparing with the real earning. Comparing with research based on data in2007, it indicates that the reliability has improved a lot. But, still, result shows the predictions are more likely to be optimistic. And then for testing the usefulness, data are divided into2groups-positive information group and negative information group according to the analysts’optimism. Regression test is applied again. And the results tell there is no relationship between reliability of profit forecast and stock return. This means earning prediction is irrelevant to investors’decision-making. This is different from the result of a research in2007on the motherboard, which shows the relationship is negative.The fifth chapter is conclusion and related thinking. There are four parts in this chapter. The first part is conclusion. The empirical results show that securities analysts’ earning forecasts are highly reliable, but they cannot bring excess return. Another finding is that the usefulness of information does not appear. The limitations of the study are mentioned in the second part. The third part is about the summary about why securities analysts’ earning forecast could deviate. This may be caused by the volatility of the GEM board itself, drive of securities analysts’ benefit, the purpose of releasing optimistic forecasts in exchange of more private information, and motivation of the existence of earnings management from management of company. When talking about the insignificant of the usefulness of earning prediction, the author thinks this might be the result of excessively speculation and lack of the idea of value investment. Also lack of trust from investors led by insufficiently independence of Securities analysts might also decrease the usefulness. And the over emphasis on private information could also make this problem. Some advices are made in the fourth part. It is suggested that investors need to learn more about risk and value investing. Regulations of delisting and information disclosure should be improved as well. Further, for avoiding damaging medium and small investor’s benefits, supervision to securities analysts, brokers and other stakeholders also needs to be strengthened.