Pair analyst coverage and return comovement: Evidence from China

This paper examines whether pair analyst coverage strengthens return comovement in the Chinese stock market. We verify two impact mechanisms. First, consistent with the Coverage-Specific Spillover Hypothesis in Muslu et al. (2014), we find that analyst report conveys coverage-specific information that emphasizes commonalities among stocks in coverage and spillovers to prices of other stocks covered by the issuing analyst. Second, we develop and validate a new channel, the Related-News Diffusion Hypothesis, which argues that analysts expedite information flow across connected stocks in their coverage more greatly than they do across connected stocks outside their coverage. Furthermore, we find that stock pairs with greater pair analyst coverage display higher return comovement. Our findings have important implications for the information intermediary role of Chinese analysts in producing coverage-specific information and expediting inter-firm information flow.