Publication of share recommendations in Lianhe Zaobao : testing for market response

Abstract

The local Chinese press, Lianhe Zaobao, publishes share recommendations by brokerage houses weekly. These recommendations could constitute second-hand information as clients of brokerage firms are usually provided with the recommendations ahead of publication in the press. The purpose of this paper is to examine the impact of the publication of these share recommendations on the local stock market and draw some practical inferences for investors. Examinations are focused on the price response of the recommended shares, the speed of price adjustment, the economic content of the recommendations and the profitability of using share recommendations. Weekly share recommendations are collected from November 1993 to June 1994 and the resulting portfolio sample consists of 69 ' BUY' recommendations. The event study methodology is adopted to analyse the price behaviour of share prices in the days surrounding the publication day. The results obtained suggest evidence that such recommendations induces abnormal returns on the publication day and causes the market to move. Abnormal returns are also detected prior to the publication day, suggesting evidence that the market does not adjust instantaneously and fully upon the publication of the recommendations on the paper. This supports the view that the rate of price adjustment depends on the degree of dissemination of the share recommendations. Though there is price response to the publication of these recommendations, such price adjustments are only temporary. As such, it may be concluded that there is no real economic content in the recommendations. It appears that profit opportunity tends to concentrate around the publication day, but such profits are eroded when transaction costs are taken into consideration. The paper also considers the impact of recommendations by different brokerage firms. The paper also considers the impact of recommendations by different brokerage firms. Recommendations by Phillips Securities and United Overseas Bank (UOB) Securities seem to contain information and induce abnormal returns. But again, transaction costs will eliminate the profits. Overseas Chinese Banking Corporation (OCBC) Investment Research's recommendations, on the other hand, do not seem to exert an impact on the market.