Ownership structure, stock volatility and analyst independence

Abstract

Purpose – The purpose of this paper is to examine securities analyst independence in China's capital market and the effect on analyst independence of institutional investors’ shareholding and separation between control rights and cash flow rights of ultimate controller. Design/methodology/approach – Using data of China's listed companies from 2006 to 2012, the authors empirically tested the relationship between analyst following and volatility of stock return. And based on the test, the authors investigated the role played by institutional investors’ ownership and separation between control rights and cash flow rights of ultimate controller. Findings – According to the empirical results, there is a significant negative correlation between analyst following and volatility of stock return. Also, shareholding of institutional investors and the separation between control rights and cash flow rights of ultimate controllers will have an impact on the relationship between analyst following and volatility of stock return. When institutional investors hold higher proportion or the separation between control rights and cash flow rights of ultimate controllers keeps at a high level, the negative correlation between analyst following and volatility of stock return will weaken. Originality/value – First, based on the theory of market intermediation, the paper examined analyst independence by investigating and analyzing the relationship between analyst following and volatility of stock return. Second, it analyzed the factors affecting analyst independence by integrating enterprise characteristic variable and market characteristic variable on the basis of introducing two variables – shareholding of institutional investors and the separation between control rights and cash flow rights of ultimate controllers.