Taken in its entirety from AACSB's Biz Ed magazine Nov/Dec 2012 issue "Where Technology meets Business", www.e-digitaleditions.com/i/90487/51
(Research paper, "Analyst Coverage, Information, and Bubbles", on SSRN, June 2012)
Market bubbles like the one that preceded the recent housing collapse could be mitigated or even prevented if governments and regulatory bodies shared information with the public about factors that determine an asset’s value. This is the finding of research by Timothy Burch and Sandro Andrade of the University of Miami School of Business Administration in Florida, and Jiangze Bian of the University of International Business and Economics in Beijing (Wikipedia), China.
The group examined China’s stock market during a six-month period in 2007 when stock prices nearly tripled and trading activity nearly quadrupled. They found that stocks with the most analyst coverage had significantly smaller bubbles than those with no analyst coverage. For example, stocks with 20 analysts reporting on them had bubbles that were more than 60 percent smaller than stocks with no analyst coverage. “Our research shows that making relevant information about an asset readily available reduces disagreement, which in turn makes bubbles less severe,” says Burch.
The researchers suggest that to limit bubbles in the stock market, government agencies could collect and disseminate information and even subsidize analyst research where needed. To reduce the odds and severity of real estate market bubbles, governments and regulatory agencies could disseminate information about transactions, appraisals, rental yields, vacancies, demographic/migration trends, prospective changes in zoning laws, and real-property borrowing statistics.
“This could be achieved by creating a ‘Kelley Blue Book’ for real estate—a centralized, well-promoted Web site where everyone could go before making real estate decisions,” says Andrade. “Analyst Coverage, Information, and Bubbles” is forthcoming in the Journal of Financial and Qualitative Analysis.
Abstract:
This paper uses the unique setting of the 2007 stock market bubble in China to examine whether information dissemination mitigates bubbles. Using multiple measures of bubble intensity for each stock, we find significantly smaller bubbles in stocks with greater analyst coverage. The abating effect of analyst coverage on bubble intensity is weaker when there is greater disagreement among analysts. This suggests that, in line with resale option theories of bubbles, one channel through which analyst coverage mitigates bubbles is by coordinating investors' beliefs. Consistent with this particular information mechanism, stock turnover is negatively correlated with analyst coverage, and the abating effect of analyst coverage on stock turnover is weaker when there is more disagreement among analysts.
Comments