There always has been the needed to assess the role that is placed by security analysts in the emerging markets. The desire is informed by the establishment that stock prices in the emerging markets move more together than the situation is in the developed markets. The implication of this finding is the suggestion that there is less first customized information in the emerging markets. In this case, the assertion is that the emerging markets are characterized by weak property rights which consequently discourage informed trading, preventing firm specific information from being integrated into the stock prices.
The emerging market’s lack of firm specific information is associated with a number of factors that include minimal regulations as well as dismal enforcement of information disclosure. There is the challenge posed by low degree of voluntary disclosure as well as corporate transparency and that most companies in the emerging markets are either owned by families or affiliated to groups making it difficult to collect the information.
Nature of Information Produced By Security Analysts
Generally, there has been the assessment of the issue of the nature of the information that is often produced by security analysts. While the availability of company specific information has an impact on external financing as well as efficiency of capital markets, there is the lack of clarity on the role played by security analysts in the generation of company specific in these emerging markets. In one of the attributes established in the US, the assertion is that while presence of insiders as well as institutional investors increase the amount of company specific integrated in the stock prices, security analysts tend to decrease the amount of information.
The Adoption of Stock Returns Synchronicity
The adoption of the stock return synchronicity as substitute for the quantity of company specific information impounded in the stock prices helps in the assessment of the relationship with the degree of analyst’s activity. In those cases that analysts predominantly generate company specific information, it becomes possible to observe the prevailing negative relationship between the movement of stock price synchronicity and the number of security analysts. Conversely, if analysts are generating market wide information, it becomes possible to establish the positive relationship. Through the use of R2 statistics from the market design as a synchronicity assessment of the movement of stock, there is the establishment that the greater coverage by analysts increases the synchronicity of the stock price.
Stock Prices and Forecast of Earnings
The chief determinants of valuation of stock price encompass the reevaluation of a security via the assessment of future earnings expectation. Overall, the prices of stock are linked to current and future earnings. Further, assessment of how stock prices contain information on future earnings entails an evaluation of the accuracy of these results. While analysts specialize by industry and their comprehension of a specific industry is applicable to other companies in the industry, any company specific events have an impact on the earnings of the other companies on the same industry.
Overall, emerging markets are no different from the developed markets. At surface value, issues of poor information disclosure and lack of corporate transparency in emerging markets lead to the assumption that there will be large return to scarcity in production of firm specific information. It however could be that the cost of collecting the information is very high that security analysts produce their earnings forecasts using the microeconomics data. Until there is the improvement in the access to information by security analysts, it will not be possible to gather company specific data, implying this information will not be integrated into stock prices.
Mike Halliwan is author of this article and stock trader. He writes also for unh stock prediction service.
May 16, 2017