Featured faculty: Wu Jing, George Yang, Johnny Li, and Lisa Wan
Written by Putro Harnowo

The world started 2026 with a complex mix of opportunities and risks. Global productivity and economy have slowed down, but the Organisation for Economic Co-operation and Development expects emerging Asian markets to be resilient.

Following the recent US-China tariff truce, China achieved a record trade surplus exceeding US$1 trillion last year, setting the stage for intriguing developments in 2026. Meanwhile, sustainability backlash dominated 2025, with significant environmental, social, and governance (ESG) investment outflows in the US, leaving the sector trajectory uncertain.

Rapid demographic ageing in Asia and Europe will transform the insurance industry, with developed markets projected to see 35 per cent more individuals aged 65 and older by 2050 compared to 2025. Amid declining birth rates, younger consumers shift their priorities to products and services that provide emotional satisfaction, fueling the “emotional consumption” trend that continues to shape business.

Against these backdrops, we present our 2026 outlook by gathering insights from the Chinese University of Hong Kong (CUHK) Business School faculty. The first outlook highlights the hottest topics in technology, and the second part looks into economic and consumer behaviour that will redefine businesses.

1. New global order with a fragmented yet innovative world

Trade frictions between the US and China have already driven global firms toward diversification, prompting a shift away from reliance on Chinese manufacturing. However, Wu Jing, Professor at the Department of Decisions, Operations, and Technology, explored in his study that complete decoupling remains challenging due to entrenched dependencies.

“Currently, the most prominent strategy is ‘China plus one’ where companies maintain a baseline of production in Chinese Mainland but diversify into other emerging markets,” he says. “Relocating operations to allied or nearby countries appears to mitigate geopolitical risks, but their long-term sustainability is uncertain.”

A notable example of such dependencies is the controls over high-end computing chips by the US, which may not survive without the supply of rare earths from China. This tug-of-war was resolved at a summit of the two world leaders last year, but the truce is seen as a temporary fix, as Singapore’s Prime Minister echoed that the intense competition will continue.

“Companies are increasingly forced to navigate multiple, often conflicting regional supply chains, each governed by its own set of rules. In practice, this often means maintaining dual systems, one aligned with Western standards and another with China, which significantly drives up operational costs as they must build production lines and logistics networks to comply with different regulatory regimes,” Professor Wu adds. “If relations deteriorate further, a bifurcated supply chain system is probable.”

Not only posing a risk to global economies, Professor Wu sees geopolitical fragmentation likely to hamper sustainable supply chains by disrupting the flow of critical materials, driving up costs and creating inefficiencies. However, he believes there would be a silver lining. “Fragmentations may accelerate innovation through competitive investments, as companies facing disruptions would be incentivised to develop innovative solutions and technologies.”

2. Green finance is recalibrating

The US political polarisation, coupled with EU regulatory adjustments amid corporate and governmental pressure, drove much of the ESG backlash last year. Elsewhere, ESG investments face stricter rules: China’s new framework requires listed companies to disclose their decarbonisation plans this year, while firms listed on Hong Kong’s Hang Seng Composite LargeCap Index are mandated to disclose carbon emissions from their suppliers.

These developments underscore resilience, refining the field by weeding out superficial approaches. “Maximising ESG value is not only about disclosing and reporting, but also about what the companies are actually doing,” says George Yang, Professor at the School of Accountancy. “Firms need to be transparent and provide credible and verifiable evidence to stakeholders, especially investors.”

One of the main criticisms is that green investments may obscure the potential earnings. Professor Yang’s recent study finds that prioritising ESG information can make a company’s stock price less accurately reflect future returns, since investors may overlook traditional financial metrics. This finding reveals implications that extend beyond the surface.

“Sensible ESG initiatives are intended to be aligned with corporate strategies and shareholder values, including profit maximisation. However, in the value maximisation of ESG investments, we need to pay attention to a longer time frame than in the traditional approaches,” he adds.

Value maximisation of ESG investments involves incorporating ESG factors to achieve optimal financial performance. As opposed to traditional approaches that typically focus on maximising profits in the short term, ESG investments often take a longer time, even years, to deliver full benefits for shareholders.

Such a gap calls for the need to manage and balance shareholders’ expectations. In this regard, Professor Yang emphasises financial analysts’ crucial role in linking sustainability goals to investor decisions. “Financial analysts should pass investors’ concerns and expectations to the firm and help the firm to improve its actual ESG initiatives.”

3. Insurers’ battle for the ageing population

As the proportion of elderly citizens rises in some parts of the world, the insurers face mounting pressure to manage spiralling claim costs and a wave of soon-to-retire customer base. Johnny Li, Professor at the Department of Finance, observes that only those who master the art of extracting valuable insights from large and intricate big data can survive.

“Insurers aim to accurately categorise individuals with different health profiles into appropriate risk categories and corresponding premiums effectively. Those that fail to leverage data analytics for this purpose will be crowded out of the market,” he says.

To illustrate, Insurer A charges US$100 for all customers, and Insurer B uses predictive analytics, leveraging health history, lifestyle, and medical records, to assess the risk of each policyholder and charges US$50 to healthy customers and US$150 to less healthy ones. Healthy individuals would choose Insurer B, leaving Insurer A with high-risk clients, rising costs, and eventual failure.

“In practice, there are no insurance products that can be called unique,” Professor Li says. “Many insurers are already using predictive analytics, but those that are willing to invest more to have more refined models can put customers into finer categories, and they tend to have a better competitive advantage.”

Professor Li has developed a new method to forecast longevity risk, a financial risk of a person living longer than their savings, for China’s population. The country only saw the insurance industry emerge after 1979, making its population data inconsistent. As a comparison, insurers in Western markets have collected risk data since the 18th century.

He notes that China’s vast territory leads to regional differences in longevity risk, and these trends are likely to diverge further as socioeconomic disparities persist. Therefore, predictive analytics is essential for insurers to thrive. “With limited data available in the Chinese market, factors such as gender, city of residence, and income may be incorporated into a machine-learning-supported model.”

4. Emotional connection is the prime consumer driver

2025 has seen collectable plush monster toys called Labubu taking the world by storm, with teenagers and adults lining up at stores. In Hong Kong, a Japanese character series, Chiikawa, has captured fans’ hearts through themed cafés and pop-up events celebrating its cute and comforting charm.

While AI has integrated itself deeper into our daily lives, human emotions remain utterly irreplaceable and may become more profound in consumer behaviour. For example, a recent report by the AI Security Institute shows that a third of UK adults have turned to AI chatbots for emotional support.

Lisa Wan, Associate Professor in the School of Hotel and Tourism Management, observes modern customers increasingly seeking deep emotional connections and value beyond the product’s functional benefits. “In the case of Labubu or Chiikawa, the appeal lies beyond the toy, but the surprise in the blind box, scarcity from limited editions, and social buzz increase the emotional drive to buy,” she says.

Emotional connection also matters in the tourism industry. Professor Wan’s study highlights how emotional factors, such as thematic storytelling and colour cues, drive customers’ impulsive buying behaviour. Travellers also often form emotional bonds with a destination even before they arrive, sparked by captivating articles, social media, or heartfelt stories shared by friends and loved ones.

Applying an emotional touch may also be useful for Hong Kong, which has seen hotel occupancy rebound, but retail spending and hotel stays are lower than pre-pandemic levels. The city could consider shifting away from mass shopping toward cultural and authentic experiences to foster emotional connection.

“Hong Kong has unique cultural assets, including the mix of East and West, Cantonese heritage, street markets, and festivals,” says Professor Wan. “More attention should be given to how visitors feel connected to the region and the Greater Bay Area. With economic headwinds and more cost-aware consumers, emotional consumption means shifting from luxury for luxury to emotion-driven value, where deep and meaningful experiences matter, even in moderately priced stays.”

Professor Wan elaborates that when customers feel emotionally attached, they become advocates, community members, repeat visitors, and co-creators of value. “Their loyalty goes beyond ‘I like the hotel’ to ‘I feel connected to the brand and destination.’ Loyalty isn’t just about returning customers, but also making them willing to recommend to others.”

The post China Business Knowledge’s 4 market forces in 2026 first appeared on China Business Knowledge.

Featured faculty: George Yang
Written by Ellis Ng

Environmental, social and governance (ESG) are the three words that have transformed the stock market over the past decade. As investors increasingly factor sustainability into their decisions, the shift is creating unexpected ripples in how stock prices reflect company performance.

By late 2024, green, social, sustainability and sustainability-linked bonds reached a staggering US$6.6 trillion globally, according to a leading European financial services group Societe Generale. The growth has been particularly significant in Asia, where companies are racing to meet international ESG standards to maintain their competitive edge and support the region’s transition to net-zero emissions.

“Firms’ performance in addressing ESG issues and ESG reporting and disclosure is more and more emphasised by corporate stakeholders and regulators, but the inherent complexity of making financial implication from ESG information means that investors will encounter severe challenges to incorporate it in their investment decisions,” says George Yang, Professor of School of Accountancy at the Chinese University of Hong Kong (CUHK) Business School. “Therefore, it should be enlightening to understand the status of the impact of such challenges in stock valuation.”

Stock price represents the company value and it reflects the company’s all future profits in investors’ expectations. However, the increasing ownership by investors with an emphasis on ESG may be shortening that “futureness.”

A new study by Professor Yang and his PhD student Zhang Yaojia, as well as Zhan Xintong of Fudan University and Zhang Weiming of IE University, uncovers a surprising consequence of this transformation. Their research paper titled Socially responsible investors and stock price informativeness discloses that the growing influence of socially responsible investing makes stock prices less reflective of companies’ future earnings.

Green waves sweep markets

When companies have many investors focused on social responsibility, the study found they experience two interesting effects. First, their stock prices don’t change as dramatically when earnings information comes out. However, when these companies face any issues related to ESG, their stock prices react more strongly.

To reach these conclusions, researchers studied the data of 22,059 American listed companies between 2004 and 2019 from S&P Compustat, the Centre for Research in Security Prices and Thomson Reuters. They identified socially responsible institutional ownership by examining how high their investment portfolios scored on ESG factors. They then analysed how much information about future earnings is reflected in the current stock price and studied whether having more socially responsible investors changes this relationship.

The researchers needed to ensure their findings weren’t skewed by investors’ selection. To do this, they looked for situations where exogenous events, rather than investor preferences, caused changes in socially responsible institutional ownership.

“An increase of the socially responsible investor ownership by one standard deviation is associated with about a reduction of 9 per cent of the stock price informativeness on future earnings.”

Professor George Yang

To see the funds’ performance, the researchers turned to the Morningstar Rating that ranks publicly traded mutual funds and exchange-traded funds. Due to random market or industry factors instead of savvy investment, the funds can earn an extra star in their rating, and this small change typically attracts additional cash flows. The researchers then compared socially responsible funds that received rating upgrades against similar traditional funds that didn’t get upgrades.

The analyses found that mutual funds that receive a higher rating from Morningstar suddenly had more socially responsible investors, likely not because of improved financial performance, business fundamentals, or overall quality, but merely for their better rankings. This result helped the researchers understand how an increase in green investors affects stock prices.

The study shows an important change in how company stocks are valued when they have many socially responsible investors. A higher level of socially responsible investors is associated with a lower level of stock price informativeness on future earnings, which implies that the green investors do not invest in firms’ long-term financial success as they promised.

“Socially responsible investor ownership has been substantially increasing in public firms around the world,” Professor Yang says. “Our evidence shows that the rise of such ownership is accompanied by reduced informativeness of stock price on firms’ future earnings.”

Socially responsible investors are found to place more weight on a company’s environmental and social impact than on its financial performance. As a result, the stock prices of these companies tend to reflect more ESG information and less earnings information, representing significant challenges investors face when processing information and allocating attention.

“An increase of the socially responsible investor ownership by one standard deviation is associated with about a reduction of 9 per cent of the stock price informativeness on future earnings,” he adds.

Feedback loop challenge

Professor Yang highlights that the above effect becomes even stronger when rating agencies like MSCI and Thomson Reuters ASSET4 give conflicting assessments of the same company. This is likely because socially responsible investors spend more time understanding these disparities and making their own judgments, meaning they have less time and resources to analyse traditional financial information.

When climate change gets more media coverage, socially responsible investors become more focused on environmental issues. They spend more time evaluating how companies are handling climate-related risks and opportunities and less time analysing financial performance.

“We observe that when socially responsible investor ownership increases, a company’s stock price is less responsive to information about future earnings, including the earnings forecasts supplied by firm management or those produced by financial analysts,” Professor Yang says.

These analysts, who typically focus on traditional financial measures, find it harder to predict earnings for these companies. They also struggle to adapt their analysis methods to include the environmental and social factors that socially responsible investors care about.

It all but leads to a feedback loop: As more socially responsible investors buy into companies, stock prices become less reflective of future earnings. It makes these companies less penetrable to investors who are familiar with the traditional valuation framework but not yet equipped with tools to dichotomise the new valuation factors (namely, ESG-related risk and performance).

Professor Yang notes that investors face significant challenges when trying to include environmental and social factors in their investment decisions because these factors aren’t purely financial. As more investors embrace socially responsible investing, there is a need to understand how the trend is affecting the sustainability of the financial system.

“Investors should spend more effort to figure out how to parse out the value-relevant portion of the ESG-related information and integrate such information with traditionally used financial information to form investment decisions,” he adds. “They need to be aware that this is not an easy task.”

The post Are green investments hurting the futureness of the stock price? first appeared on China Business Knowledge.

Featured faculty: George Yang
Written by Putro Harnowo

Many countries require listed companies to have independent directors sitting on their boards. These directors have no ties to the company, are not on the executive team, and do not participate in daily operations, ensuring ethical and effective management while balancing stakeholder interests. Unfortunately, it is not uncommon for these overseers to be besieged by multiple issues that prevent them from performing their roles.

Among many possible reasons, controlling shareholders often immensely influence the nomination of independent directors, who receive meagre compensations, giving them less motivation to exert monitoring efforts. A lack of expertise could also be the cause, as many independent directors are industry outsiders with little business experience. Regardless, their oversight function is vital in ensuring corporate governance.

George Yang, Professor of the School of Accountancy at the Chinese University of Hong Kong (CUHK) Business School, tries to address this issue. He investigates the effect of China’s “sunshine enforcement”, where the regulators use public enforcement mechanisms to encourage independent directors to step up their game. The concept is based on increasing transparency and public visibility in enforcing laws to improve accountability and compliance.

In a study titled Public enforcement through independent directors, Professor Yang and his co-authors, Li Xiaoxi and Rao Pingui of Jinan University, as well as Yue Heng of Singapore Management University, examined the role of independent directors in responding to a comment letter, a publicly shared inquiry from regulators regarding companies’ filings, disclosures, or compliance with regulations.

Specifically, the researchers look into certain transactions between companies and parties with pre-existing relationships. Such transactions, known as related-party transactions, are particularly concerning in emerging markets like China as they can lead to expropriation, an unfair practice where controlling shareholders take advantage of their position to benefit themselves at the expense of minority shareholders.

“Using data from China, we find that firms receiving comment letters concerning related-party transactions from stock exchanges significantly reduce their related-party transactions in subsequent years,” says Professor Yang. “Managers, including independent directors, particularly care about their ‘face’. They would be ashamed if they received sanctions from the market regulators, which would result if the issues in the comment letters were not properly resolved.”

Independent directors are also more likely to dissent or resign if their firms fail to fix the issue after receiving comment letters, especially when their reputation is at stake, signifying that the reputation concerns can be utilised to enhance public enforcement.

Rules regarding related-party transactions and independent directors

Companies are often more comfortable dealing with familiar parties, and some are inclined to do business with entities or individuals with prior relationships, either through family ties, business partnerships, or shareholding interests. Although legal, such related-party transactions may create conflicts of interest, which is why public companies in many countries are required to disclose them.

To protect shareholders’ interests, the China Securities Regulatory Commission (CSRC) issued guidelines that clearly require certain related-party transactions, including those exceeding three million Chinese yuan or five per cent of the firm’s net asset value, to be approved by independent directors before being submitted to the board for discussion.

“Managers, including independent directors, particularly care about their ‘face’. They would be ashamed if they received sanctions from the market regulators.”

Professor George Yang

The Division of Corporation Compliance and Disclosure of each Chinese stock exchange is responsible for reviewing various filings of listed firms at least once every three years and will send comment letters to relevant firms. The firms are required to reply within five business days. Under the sunshine enforcement mentioned above, these letters and the firms’ responses are published simultaneously on the exchanges and CSRC’s websites.

Several rounds of correspondence may be needed before a resolution is reached. Unsatisfactory responses could lead to detrimental consequences, such as restrictions on bond issuances, seasoned equity offerings, stock-financed acquisitions in the following 36 months and even suspension of trading.

As the person tasked to review related-party transactions, independent directors would be held accountable if the commented transactions turn out to have violated securities regulations. Being charged by the CSRC for negligence would seriously undermine a director’s future career and essentially bar them for life. From 2002 to 2018, the researchers found that 37 per cent of sanctions against independent directors were related to related-party transactions.

Reputations and careers matter for independent directors

The researchers collected more than 1,100 comment letters issued by the Shanghai and Shenzhen stock exchanges from 2014 to 2017. Additionally, they also extracted financial information related to related-party transactions from the China Stock Market and Accounting Research Database, then collected information to measure independent directors’ reputations from the Chinese Research Data Services Platform database. Almost half of the comment letters explicitly discuss issues about related-party transactions, and 90 per cent of the listed firms in the sample reported related-party transactions.

“We find that firms decrease their related-party transactions by 16.4 per cent after receiving a related-party transaction comment letter,” says Professor Yang.

After measuring independent directors’ reputation and career concerns using media mentions, number of directorships, age, and membership in the audit committee, the researchers found that the reduction effect of comment letters becomes stronger when the independent director has a higher reputation or career concerns. This result appears primarily in non-business-related-party transactions, which means the transactions were not closely related to the core business operations and, therefore, more likely to be for expropriation purposes.

As Chinese society places a high value on social image, the negative exposure from the CSRC comment letters would also damage independent directors’ social reputations. Taken together, when the comment letters increase regulatory risk and threaten their reputations and career prospects, independent directors would be eager to confront controlling shareholders and management. The study found that there is an increasing 10 per cent chance that independent directors will either dissent or resign if the firms do not improve after receiving related-party transaction comment letters.

“Playing friendly toward controlling shareholders becomes a lower priority to independent directors when regulatory risk suddenly increases,” says Professor Yang. “Independent directors worry about their reputation largely because it affects their career prospects, and it could also impact their social image, friendships, or even the well-being of their family members or those otherwise tightly connected to them.”

As related-party transactions often benefitted controlling shareholders significantly, penalties must be stringent and intrusive to achieve the intended outcomes, potentially disrupting business operations. The study suggests that public comment letters can trigger independent directors to enhance their monitoring efforts. This offers valuable insights into the effectiveness of public enforcement in limiting self-dealing activities, particularly in emerging markets.

Finally, to enhance the effectiveness of regulatory oversight and improve corporate governance practices in firms, Professor Yang suggests “lay responsibility on specific people, especially those who do not directly benefit from potential frauds but are involved in the governance and monitoring process.”

The post To motivate independent directors, put them in the spotlight first appeared on China Business Knowledge.

By Jaymee Ng, Principal Writer, China Business Knowledge@CUHK

Culture shapes the way people work and play. It is also known to affect how people and organisations make economic decisions, as well as how markets behave. In the financial services sector, there is evidence that greater cultural diversity enhances the overall forecasting performance of sell-side financial analysts, but little is known about how specific cultural traits can influence individual behaviour. It is with this in mind that a group of researchers sought to find out how the level of individualism – a key dimension when quantifying cultures – can affect the forecasting behaviours of financial analysts.

The study National Culture and Analysts’ Forecasting Behaviour was jointly conducted by George Yang and Cao Ying, Professor and Associate Professor, respectively, at the School of Accountancy at The Chinese University of Hong Kong (CUHK) Business School in collaboration with Prof. Rubin Hao at Beijing Normal University. The researchers discovered that analysts who hailed from cultures with more individualistic tendencies tend to overweight information they derived by themselves and deviate from consensus, whereas their more collectivist prefer to conform to the consensus.

“Analysts tend to inherit individualist or collectivist traits from their culture of origin.”

Prof. George Yang

“America is a nation of immigrants, and it gave us the opportunity to see how culture can affect analyst forecasts in this melting pot of a market,” says Prof. Yang. “We found that analysts tend to inherit individualist or collectivist traits from their culture of origin, which affects how they process information and this in turn influences their role as information middleman in the capital market.”

The Bird That Sticks Out

The researchers sampled over 9,000 analysts in the U.S. across 68 different cultural backgrounds. Each analyst was assigned a score that represented their likely level of individualism based on his or her country of origin on Hofstede’s cultural index – a framework developed by Dutch social psychologist Geert Hofstede to understand the differences in culture across countries. In general, this led to analysts with cultural ties to the U.K. and its former colonies – Australia, Canada and the U.S – having the highest individualism scores. This was followed by analysts whose roots hailed from Northern and Western Europe, such as Netherlands, Italy, and France. In comparison, analysts with backgrounds in Asian countries, South America, and Africa typically scored the lowest in terms of their level of individualism. This score was then cross-referenced with the analyst’s forecasts and stock recommendations in the past.

The study results show that a change from the lowest individualism level to an average level increases the odds of the issuance of a bold forecast by a percentage point varying between 3.8 and 9. Also, the odds of issuing a bold stock recommendation increases by a percentage point varying between 5.7 and 7.3 when the degree of individualism level changes from the lowest to the typical level.

“’The bird that sticks out always gets shot’ is a well-known Chinese proverb, and it summarises the idea that people who grew up or were influenced by their background in collectivistic cultures tend to avoid acting in a way that would draw undue attention to themselves. On the other hand, people with background ties to more individualistic cultures are usually encouraged to be different and unique, either as a result of their upbringing or peer influence. It’s also not inconceivable that this national culture can also affect how analysts subconsciously make decisions in their forecasts as well as whether they recommend investors to buy, sell or hold a particular stock,” says Prof. Cao.

Self-Confidence and Private Information

The researchers explain that analysts who hail from individualistic cultures typically exhibit greater self-confidence, and this can lead them to overweight their private information that they gathered as part of their research process. They also tend to possess a stronger belief in their ability to analyse this information.

“Due to this strong self-confidence, individualistic analysts don’t tend to feel an over-riding necessity to conform to the consensus forecasts of their peers,” says Prof. Yang. “They tend to be more interested in forming unique, somewhat bold forecasts and stock recommendations. In short, they are happy to stand apart from the crowd.”

Prof. Yang adds that while individualistic analysts tend to be more confident, this did not mean that they were more accurate than their collectivistic peers. “Although bold reports generate strong market reactions, those issued by individualistic analysts are also more likely to be discounted by the market, presumably because these analysts tend to overemphasise their private information,” he says.

The Individualistic Discount

The study found the market typically reacted in a stronger manner to bold reports issued by collectivist analysts than to those with more individualistic inclinations. The results show that when analyst individualism increases from the lowest level recorded to the average, the market discounts their stock recommendations by 38.5 basis points – which represents 22.6 percent of the average price effect of a bold recommendation. This suggests that the market does not view the private information revealed by individualistic analysts as informative as the information uncovered by collectivist analysts.

On the other hand, the study notes that individualistic analysts play a more significant role than their collectivist peers in reducing stock price synchronicity, which is a measure of the degree to which stock prices reflect market-wide information as opposed to firm-specific information. A higher stock price synchronicity represents a lower informative stock price, meaning that investors may find it more difficult to understand the firm due to less firm-specific information.

The researchers measured the stock price synchronicity of firms that lost coverage by an individualistic or a collectivist analyst as a result of the merger or closure of the brokerage they work for. They found that the stock price synchronicity of firms that lost coverage by individualistic analysts increased. This effect was especially strong when fewer analysts covered the firm. “These analysts may have gone to the same business schools or share similar work experiences, but their inherited culture can propel them into making drastically different forecasts,” Prof. Cao says. “This new cultural perspective can help us to better understand the reason for why analyst forecasts can be so diverse.”

Other Cultural Dimensions

The research team delved deeper into the cultural impact on analysts. They found that analysts from collectivist cultures tend to be bolder if their ancestors immigrated to the U.S. earlier. This suggest that although cultural impacts could last across generations, it deteriorates over time.

“Inherited culture can propel analysts into making drastically different forecasts.”

Prof. Cao Ying

Interestingly, the researchers also discovered other cultural traits that influenced analyst forecasting behaviours. For instance, they found that analysts who come from cultures where people prefer to avoid high uncertainty are less likely to issue long-term forecasts and more likely to follow low-risk companies. The level of uncertainty avoidance is another of the factors (besides the level of individualism) that the late-Prof. Hofstede used to analyse cultural differences between countries as part of his Cultural Dimensions Theory. Examples of countries which score high in terms of uncertainty avoidance include Greece, Belgium, Russia and Italy. Such behaviour is in line with their risk aversion tendency.

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On the other hand, analysts from long-term oriented cultures (another of Hofstede’s cultural dimensions) tend to favour issuing long-term forecasts as their culture places equal importance on the future and the present time. Long-term oriented cultures, such as China and Japan, typically foster virtues such as perseverance and thrift.

“Business leaders in the financial services industry are under increasing pressure to diversify the labour force. However, little is known about how racial and ethnic diversity affects the workers. The results of our study can help business leaders and policy makers to better understand how national culture influences the behaviour of financial professionals and their impact on the capital market,” Prof. Yang says.

The post Buy, Sell or Hold: Can Culture Influence Analyst Recommendations? first appeared on China Business Knowledge.

By Fang Ying, Senior Writer, China Business Knowledge @ CUHK

Research in sociology and psychology tells us that beauty can have a significant impact on people’s earning, job opportunities and career success and that attractive individuals generally receive better treatments in the workplace and other social settings.

In the working paper “More than Skin-deep? Analysts’ Beauty and Their Performance”, Prof. George Yang, Associate Professor at the School of Accountancy of CUHK Business School, extends the study to information acquisition and forecast performance in China’s capital market. It reveals that the attractiveness of financial analysts is positively associated with their earnings forecast accuracy and stock recommendation informativeness.

“Our study aims to look at whether a predetermined attribute of a financial analyst, namely, their physical attractiveness, affects his or her success in information acquisition and job performance,” says Prof. Yang who works on the study in collaboration with Prof. Cao Ying, Associate Professor of the School of Accountancy of CUHK Business School, Prof. Guan Feng of Shanghai Lixin University of Commerce, as well as Prof. Li Zengquan, Dean of the School of Accountancy at Shanghai University of Finance and Economics.

In capital markets, sell-side financial analysts who are generally employed by broker-dealers and investment banks, play an important role in disseminating the information on particular securities or stocks, giving investors the necessary information they need to judge the attractiveness of certain investments.

“In China, the influence of financial analysts on the stock market is even greater because the market is dominated by retail investors who are more likely to be influenced by the so-called expert opinions than institutional investors,” says Prof. Yang.

Therefore, the financial analysts would actively seek out information from various sources, and the private communication with firm management is one of the critical sources, being viewed as more useful to their earnings forecasts and stock recommendations than firms’ public disclosure and even their own primary research.

Prior research already reveals that analysts who cater to the interests of managers enjoy an information advantage and exhibit superior forecast performance, according to researchers.

The Study

In the study, the researchers studied a sample of 89,056 earnings forecasts made by 2,328 analysts from 2005 to 2014. The analysts in their sample come from 102 unique brokerages, which cover all the largest brokerages in China.

At the same time, they downloaded the head-to-shoulder ID photos of all sell-side financial analysts in the sample from the website of the Securities Association of China and asked 63 raters with different education background, occupation, income, and social experience to score them on a five-point scale: 1 for homely or not good looking; 2 for below average; 3 for average; 4 for above average and; 5 for strikingly beautiful or handsome.

“Our study aims to look at whether a predetermined attribute of a financial analyst, namely, their physical attractiveness, affects his or her success in information acquisition and job performance.”

Prof. George Yang

The 63 raters were from different settings including a Big Four accounting firm, a brokerage firm, a large private company, as well as university faculty members and students. Of the group, 27 of them are males while the rest are females.

All the raters were reminded to use the common people in the Chinese population, not the sample analysts, as the benchmark for rating and that age should not be considered in rating. Hence, the rating score would be solely based on attractiveness, not depending on how young or old he or she looks.

Lookism Matters

As expected, the study reveals that the beauty ratings of financial analysts are significantly negatively associated with their forecast errors. That is to say, more attractive analysts make more accurate forecasts.

The research team points out that their evidence suggests that more attractive financial analysts possess an advantage in acquiring information from firm management.

“Compared with other analysts, attractive analysts are more likely to gain advance access to information about pending significant corporate events, and they are more likely to issue a stock recommendation in the quarter prior to the public announcement of three types of corporate news, including restructuring, signing of important business contracts and earning warning. Accordingly, they can produce more informative stock recommendations,” says Prof. Yang.

When it comes to information access, it is important to go to the right people. Again, attractive analysts have better access to them.

“Attractive analysts are more likely to get more information from corporate site visits when they can directly interact with firm management. Our results show that firm managers are more likely to disclose information to those attractive analysts,” he says.

Taste-Driven Discrimination

However, what’s interesting is that the study also shows that the beauty effect disappears when managers are allowed to trade their shares in the open market or when their firm is under a share pledge agreement.

To explore the reason behind, Prof. Yang went on to find out if the effect was attributed to managers’ taste-based discrimination on the attractiveness of the analysts or on the notion that attractive people possess superior job-related skills and can better serve the interests of the firm.

If managers believe that more attractive analysts are more capable and valuable to firms, the beauty effect would persist when there is a strong incentive for managers to boost the firm performance and increase the stock value. But, the researchers didn’t find such evidence in the study.

“In other words, it suggests that managers’ discrimination among financial analysts is just taste-driven,” Prof. Yang comments.

“When managers need to rely more on analysts to inform and guide the market, they are less likely to allow their taste for beauty to sway the decision about which analysts to rely on for disseminating firm information,” he explains.

Apart from the relation between analysts’ attractiveness level and their forecast performance, the study also demonstrates the impact of analysts’ attractiveness on their career opportunities. Specifically, it finds that a more attractive analyst is more likely to be voted as a star analyst who is more likely to be hired by top-notch brokerage firms even if, for some reason, he or she could only get into a smaller firm initially.

A New Challenge

While social science has documented and extensively studied the beauty effect, this study provides a new perspective into the practice by financial analysts in capital markets.

Unlike in previous research suggesting that analysts who issue favorable opinions would obtain more information from firm management, the current study documents a different incentive – the indulgence of managers’ taste for beauty, which affects the interaction between managers and financial analysts.

“Since this form of discrimination originates from psychological and social bias and is difficult to regulate, it brings new challenges to regulators and practitioners in the industry,” Prof. Yang says.

The post How Beauty Influences Financial Forecast Performance first appeared on China Business Knowledge.