The role of security analysts in Japan

Abstract

To examine the rationale behind the existence of security analysts in Japan, we integrate the agency and marketing explanations in a unified testing framework. We suggest that the role of security analysts in Japan can be viewed as working alongside the brokers as part of the brokerage firm's marketing team. Based upon various measures of the marketing variables including firm size, the reciprocal of share price, and the dispersion of analysts forecasts, we find evidence indicating that stocks that are easier to market are followed by more financial analysts. We interpret these results are supportive of the marketing hypothesis. Hpwever, although empirical results for the keiretsu finns are consistent with the agency hypothesis, the agency prediction for the non-keiretsu firms is not supported. Therefore we conclude that analyst following in Japan can best be understood in the context of the marketing explanation.