Abstract
Using a unique database over local Chinese securities firm’s earnings forecasts and stock recommendations, it is shown that the average forecast error has decreased over time reflecting the maturing of the Chinese securities firms. Affiliated securities firms, defined as securities firms acting as investment banker/underwriter services, provide better earnings forecasts than un-affiliated firms which is contrary to findings from other countries. Also, forecast errors produced by local securities firms and star analysts are smaller. Finally single authored reports have larger forecasts errors than reports with several authors. In general financial markets react to stock recommendations from securities firms, but markets du not react differently to stock recommendations from affiliated and un-affiliated and local and non-local firms despite their superior earnings forecasts. As for affiliated firms, local securities firms provide better forecasts but these are not recognized by the financial markets in their reactions to stock recommendations. On the other hand financial markets react stronger to recommendations from highly ranked securities firms compared to lower ranked firms even though there is no difference in their ability to forecast earnings. Finally financial markets react stronger to stock recommendations by star analysts.
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