Research by CUHK Business School Reveals Guanxi in China
By sophia on 2016-05-25

    HONG KONG, CHINA--(Marketwired - May 24, 2016) - Why is it so important in China to understand the invisible links between financial analysts and fund managers? Because these friendships cloak the financial gain both sides might be making -- well under the radar of authorities; and ultimately, these hidden biases could damage investment in China, as shown in a research by the Chinese University of Hong Kong (CUHK) Business School.

    For the working paper "Friends in Need are Friends Indeed: The Effect of Social Ties between Financial Analysts and Mutual Fund Managers," Prof. George Yang, Associate Professor at the School of Accountancy of CUHK Business School, collaborated with fellow academic Prof. Zhaoyang Gu, Director of the School of Accountancy of CUHK Business School, and Guangqing Li at China Galaxy Securities Co., Ltd. as well as Prof. Zengquan Li, Dean of the School of Accountancy at Shanghai University of Finance and Economics. The paper is the latest in Prof. Yang's work to examine irregularities in financial markets such as insider trading and the economic effects of business relationships, and the first study to show that benefits run both ways.

    "If analysts speak positively about stocks, how do fund managers benefit? We also look at how the analysts benefit themselves from their advice," says Prof. Yang who has been able to unpick various ways in which both sides seem able to dispense rewards without being detected.

    The research makes the point in looking at social rather than business relationships. These are friendships that might be forged when an analyst and fund manager have worked together, even dated back to school or university. Ultimately, the friendships might lead to professional links.

    For the purposes of his research, Prof. Yang investigated fund managers and analysts who have previously worked under the same brokerage roof. "They're more likely to establish social ties, either directly or indirectly through common colleagues," he says.

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