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Abnormal analyst coverage and the cross-section of stock returns: Evidence from China

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  • Li, Dongxu
  • Zheng, Xiaorong
  • Zhang, Junzhe

Abstract

Information intermediaries are crucial to market efficiency. Yet their incentives can distort the information they provide. We test if analyst coverage is a more credible signal than forecast in predicting stock returns. We study China's A-share stock markets where analyst forecasts are often overly optimistic. We show that abnormal coverage is a powerful and robust predictor of future stock returns. A long-short portfolio generates a significant three-factor alpha of 1.36% per month from 2005 to 2021. This signal anticipates future fundamental improvements in profitability and earnings, supporting an information discovery hypothesis. The signal is concentrated among experienced, non-star analysts. Star analyst coverage, in contrast, holds no predictive power. This resolves a puzzle in the literature, suggesting star status in China may reflect sales ability more than research skill, with incentives aligned more with business generation than information discovery. Our results show how institutional incentives shape signal credibility, contributing to theories of information economics and asset pricing.

Suggested Citation

  • Li, Dongxu & Zheng, Xiaorong & Zhang, Junzhe, 2026. "Abnormal analyst coverage and the cross-section of stock returns: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 97(C).
    • Handle: RePEc:eee:pacfin:v:97:y:2026:i:c:s0927538x26000557
    DOI: 10.1016/j.pacfin.2026.103109
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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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