Do Chinese Stock Markets React To The Newspaper Recommendations?

Abstract

This paper studies how the stock prices in Chinese stock markets react to the stock recommendations from a Chinese business newspaper Zhong Guo Zheng Quan Bao (China Security). Using event study methodology and market model as a benchmark, we calculate abnormal returns to ascertain the impact of published recommendations. We find that there are no statistically significant long-term abnormal returns associated with the published recommendations. However, there are profitable opportunities if investors act prior to the published recommendations. We also find that the recommendations from the newspaper causes a significant short term movement two days after the publication day, suggesting a delayed response from the investors who act on the recommendation. The delayed response shows the gradual dissemination of the information in Chinese stock markets. In summary, these results indicate that press recommendations of Chinese stocks contain no useful economic information for investors who act on the published recommendations. The possible abnormal returns for investors who buy the stocks before the recommendations are made public are evidence of a market that is strong-form inefficient and the delayed response from investors to the newspaper recommendations is most likely the evidence of a market that is semi-strong-form inefficient.