The Role of Analysts : An Examination of the Idiosyncratic Volatility Anomaly in the Chinese Stock Market

Given the unique institutional setting and the role of analysts in the Chinese stock markets, we investigate the effect of analyst activities on idiosyncratic volatility (IVOL) anomaly. Our results show that the inverse relation between IVOL and future stock returns is more pronounced in the subsample of stocks without analyst coverage. For stocks with analyst coverage, revision activities further attenuate the negative relation between IVOL and future stocks returns. In fact, we find a positive relation between IVOL and future stock returns among the subsample of stocks with analyst upgrade revisions. We argue that our results are evidence of analysts playing the role of disseminating information and particularly reducing information asymmetry in the Chinese stock markets. Moreover, positive news is incorporated into stock prices more quickly in the Chinese stock markets. Finally, we show that our results are not driven by differences in limits-to-arbitrage or short-sale constraint among different stock subsamples