The 2-day competition was organised by SDA Bocconi School of Management Finance Club on March 31-April 1, 2017. It was to provide an

The competition involved a finance case study, which required participants to conduct a valuation of an innovative mobility company.

opportunity for outstanding students to build their finance and presentation skills and network with international professionals.The event was sponsored by Bain & Company, Edison and UniCredit.

The CUHK team comprising Amy Li, Frankie Wong, Ishan Bhatla, Mukul Phatak and Vedant Chowdhary, was presented with a cheque of € 5,000 after the tough competition, which demanded knowledge, teamwork and stamina.

An Opportunity to Learn

“It was a great experience and an opportunity for us to learn and network with other participating schools. We were very pleased with our

teamwork, as we had to deal with much pressure. We believe that it was a shared goal and our determination that helped us achieve the result that all of us had aimed for,” Ishan said.

Finance Case Study

The competition involved a finance case study, which required participants to conduct a valuation of an innovative mobility company.

The teams were given 3.5 hours to do their analysis and present it to a panel of judges. Four winning teams entered the final round and made a presentation in front of an audience.

The organisers wrapped up the competition with a networking event in the evening for all MBA students and professionals.

Participating Teams

The participating teams were from internationally recognized business schools, including London Business School, Cambridge Judge Business School, INSEAD, HEC, Oxford Saïd, Frankfurt School of Finance & Management, LUISS Business School, University of St. Gallen, RSM Erasmus University, TIAS, Imperial College Business School, ESADE, BBS (Bologna Business School), McGill, HEC Paris, IE, ESMT Berlin, Alliance Manchester Business School, Cranfield School of Management and University of Cambridge.(Image source:blogspot.in)

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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 and Prof. Zhaoyang Gu, Director of the School of Accountancy 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 pick out various ways by which both sides seem to be able to dispense rewards without being detected.

Unlike business relationships, friendship between such analysts and fund managers could have started under various circumstances like their having worked together, been classmates at University or even childhood as school students.

Prof. Yang investigated fund managers and analysts who have previously worked in the same brokerage. “They’re more likely to establish social ties, either directly or indirectly through common colleagues,” he says.

Deriving financial benefits from such friendship network affect markets worldwide. But as a large and emerging economy, China is known for the importance “guanxi” (connections) in daily life. With institutions meant to police irregularities in business being relatively powerless, Prof. Yang is of the view that social networks could be exploited to obtain privileged access to scarce resources or to collude against the public interest.

Analysts in China are powerful figures in the markets, which see more business from individual retail investors than in other countries. Chinese have the highest savings rate in the world and individuals pursue investment opportunities keenly. Thus, they are more likely than institutional investors to rely heavily on tips from established analysts.

Ever since China set up its first stock exchange in 1990, equity markets and the financial analyst industry have grown rapidly. By the end of 2012, some 110 brokerages employed more than 2,400 sell-side analysts who regularly issue stock research reports.

Prof. Yang claims that fund managers exploit their links with analysts to win positive reports of stocks they hold within a portfolio. “So, as an analyst, I would try and help a fund manager by speaking favourably about the stocks he or she holds, which would encourage a boost in value of their portfolio,” he says.

Some 1,200 funds in China managed by 70 mutual fund companies are periodically ranked on performance, based on the price of stock in their portfolios. These rankings play a vital role in winning new investors which dictates fund managers’ pay and promotion chances.

How do fund managers repay the favours. One way for them is to cast their ‘Star analyst’ votes in favour of that person. For the analysts, this vote brings them publicity and a resultant dramatic rise in income. Significantly, fund managers are the main voters for this honour.

“We found those with more social connections to fund managers are more likely to be selected as star analysts,” Prof. Yang says.

Another way of rewarding is to push more trading through the preferred analyst’s brokerage. Commission fees from institutional investors are the main — if not the only — form of revenue for analysts’ pay. So those who are socially connected to fund managers are more likely to receive commissions from their companies, the research found.

“It’s natural to question why this commission fee relationship emerges only between certain pairs of fund companies and brokerages and not others,” Prof. Yang says.

However, such links do not pass unnoticed in the market which tends to discount recommendations from such connected analysts to buy certain stock within a short time frame only to have stock returns go down in a few months.

Such types of analysts would not issue negative comments if the stocks held by their fund manager friends turn bad but would wholeheartedly recommend the company if there is good news.

“Admittedly fund managers would prefer accurate and high quality reports before they purchase a stock,” says Prof. Yang. “However, once they’ve established a position, they would like analysts to issue favourable opinions, or at least to withhold any negative ones to maintain the stock price at a high level.”

Those fund managers who appear to be in the know about the real value despite their analysts’ recommendations are more likely to dump the stock and buy only those recommended by analysts who are not connected.

“These results suggest that the positive nature of connected analysts’ recommendations serve to help connected fund managers to ‘pump and dump’ a stock,” says Prof. Yang. The relatively unsophisticated smaller Chinese investors are likely to follow the bogus recommendations and end up being cheated of their money.

But then, the analysts do not want to lose their credibility. So they would mix the odd biased report with genuine recommendations made on sound judgements, says Prof. Yang.

He considers that the analysis, focussing only on Chinese market, has broader implications and such ‘hard to detect’ links and biases might operate in other international markets. “The main audience of this paper will be in the US. I definitely believe that a similar phenomenon could be observed in the US and possibly Europe,” he says.

“It’s so hard for regulators to set rules. Analysts’ opinions are purely subjective — you can’t tell if they’re biased and they can say whatever they want. The analyst ratings from fund managers are also not subject to regulation. And social networks are much less conspicuous and more difficult to regulate,” he says.

“It’s virtually impossible to prosecute analysts for their bias. Unless you have hard evidence, you can’t establish deliberate bias in court. Opinions aren’t illegal,” he adds.

However, Prof. Yang is still optimistic and believes that as tighter regulations would be in place as China moves towards greater economic liberalisation, further market reforms and closer ties with Hong Kong.

“Hong Kong has stronger controls against insider trading. Also, as more educated and market savvy investors enter the field, the markets themselves might be able to achieve what the government can’t,” he adds.

“I would rely more on market discipline. If this behaviour becomes too rampant, the markets will no longer believe the recommendations. That’s the purpose of this paper — to help investors become more aware and sophisticated. Eventually, I believe these types of personal relationships will grow weaker,” says Prof. Gu, co-author on the paper.

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The B-School team comprising Professional Accountancy Program (Global Accounting Stream) student Eric Yiu Ho Kui (3rd year), Global Business Studies Program student Howard Suen Lok Ho (2nd Year), Integrated Bachelor of Business Administration Program student Jansen Wan Chun Yat (2nd year) and Insurance, Financial and Actuarial Analysis Program student Pinky Chiu Man Kei (4th year) bested nine other teams from top universities throughout the Greater China region, CUHK said in a statement.

The competition was held at at Xiamen University on March 5, 2016.

The KPMG Cup requires student participants to analyze a business case within three hours and generate a formal report to provide solutions and conduct live presentations and defense. The competition aims to test participating teams’ capabilities in business case analysis, teamwork and communication skills.

Starting this year, the KPMG Cup has become part of the KPMG International Case Competition (KICC) which will be held from April 11-14, 2016 in Dubai.

Having won the national championship, the CUHK Business School team will represent the Greater China region at the competition. In addition, the winning team members are offered overseas internship opportunities by KPMG.

“We are proud of Eric, Howard, Jansen and Pinky for winning one of the most rigorous case competitions in the country,” said Prof. Dennis Fan, Associate Dean (Undergraduate Studies) of CUHK Business School. “It reflects the very high caliber of our students that we now have won the KPMG Cup two years in a row.”

Hosted by Xiamen University, with KPMG as the title sponsor, the KPMG Cup is an annual invitational business case competition that brings together undergraduates of 10 elite universities from Hong Kong, mainland China and Taiwan, including Peking University, Tsinghua University, Fudan University, Nanjing University, Nankai University, National Chengchi University, Sun Yat-sen University, Xiamen University and Zhejiang University.

CUHK Business School was invited to participate for the first time last year and managed to bag the national title twice in a row.

“Our students have demonstrated a strong academic background, excellent teamwork and professional presentation skills. Their outstanding performance has been unanimously recognized by the adjudicators and audience alike,” said Dr. Joyce Wang, Lecturer at the School of Accountancy of CUHK Business School and the winning team’s advisor in the competition.

“This case competition has also provided a good platform for students from different backgrounds to get to know each other. Our students fully enjoyed their communication with students from mainland China and Taiwan,” he added.

CUHK Business School comprises two schools – Accountancy, and Hotel and Tourism Management – and four departments – Decision Sciences and Managerial Economics, Finance, Management, and Marketing.

Established in Hong Kong in 1963, it is the first business school to offer BBA, MBA and Executive MBA programs in the region. A present, the School offers 10 undergraduate programs and 31 graduate programs (10 MBA/EMBA; 15 Master, MSc and MPhil; 6 PhD).

In the Financial Times Global MBA Ranking 2016, CUHK MBA is ranked 26th. In FT’s 2015 EMBA ranking, CUHK EMBA is ranked 31st in the world.

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Does 8/10 equal 80/100? The answer seems obvious as both of them equal 80 per cent. But you may want to think again after reading a recent research jointly conducted by the Chinese University of Hong Kong (CUHK) Business School and Tsinghua University School of Economics and Management.

The research was conducted Tao Tao, a PhD student at the Department of Marketing of CUHK Business School, in collaboration with Prof. Robert S Wyer and Prof. Yuhuang Zheng, faculty members at CUHK Business School and Tsinghua University, respectively.

The team found that consumers would perceive a product rated as 8 out of 10 better than a product rated 80 out of 100, whereas a product rated as 2 out of 10 is perceived as worse than a product rated 20 out of 100.

The Popularity of Review Scores

Nowadays, consumers often see numbers and scores in marketing brochures or the Internet. Before making a purchase of a certain product or service, they may search on the web for the reviews. If they want to see a movie, they will visit a movie review website to find out about the score. Likewise, they will go on a restaurant review website to see how past customers rated the food and experience of dining there. Very often, consumers will make choices based on the scores of satisfaction given by other customers.

Consumers perceive a product rated as 8 out of 10 better than a product rated 80 out of 100

Marketers may also use the same tactic to demonstrate the performance or popularity of a product through numbers and scores, which are straight forward and easy to understand. For example, marketers might advertise that 7 out of 10 people use their products, or that their product’s quality performance obtains a score of 88 out of 100.

However, the range of the scale along which scores are defined could be either small or large. For example, the satisfaction rating of a film could be expressed as 7.8 out of 10 or as 78 out of 100. The market share of a product could be presented as 7 out of 10 or as 70 out of 100. Mathematically, they mean the same thing; however, they differ in their influence on consumers’ judgments.

The Scale Range Effect

In the research, the authors found that when people encounter a score expressed along a bounded score, that is, 9 out of 10 or 90 out of 100, they would initially determine whether the score is good or bad.

If they can clearly categorize the score as a good or bad one, this initial impression would form their final judgment of the score. In this case, the evaluation of the product would not differ between 9 out of 10 or 90 out of 100.

However, if they are unable to confidently categorize the score as good or bad, this ambiguity would push them to further consider how good or how bad the score is.

Here is where it gets interesting. If the score is initially categorized as a moderately good one, people would further compare the score with the high endpoint, that is, the maximum score. For example, 8 on 10 would be compared to 10 and 80 on 100 would be compared with 100)

However, if the score is initially categorized as a moderately bad one, people would compare it with the low endpoint, that is, the minimum score. So 2 on 10 score and a 20/100 score would both be compared to a 0 score.

Because people have the tendency to perceive a large number to have more value than a small number without considering its unit, the discrepancy of 20 would be judged as larger than a discrepancy of 2.

Therefore, 8 out of 10 would be evaluated as better than 80 out of 100 since the gap between 8 and the maximum score, 10, is perceived to be smaller than that between 80 and 100. In contrast, 2 out of 10 would be evaluated as worse than 20 out of 100 since 20 is much further away from the minimum score level, 0, than 2.

Using mainland Chinese, Hong Kong students and U.S. citizens as samples, the authors examined the effect scale range in different scenarios, including restaurant and product satisfaction ratings, teaching evaluation scores, examination scores, and the voting process for politicians.

When a book sold on Amazon was rated as 7 out of 10, consumers would give a higher evaluation and were more likely to purchase it than when the book was rated as 70 out of 100

They found that when a book sold on Amazon was rated as 7 out of 10, consumers would give a higher evaluation and were more likely to purchase it than when the book was rated as 70 out of 100. For a poorly reviewed product rated 3 out of 10, consumers would perceive it as worse than one with a rating 30 out of 100 and therefore be less likely to purchase it.

When it comes to voting for the next president, if people were considering the supporters of the candidate, they would perceive the voting rate as higher when presented as 82,080 thousand out of 171,000 thousand rather than as 82.08 million out of 171 million. However, if they were considering the citizens who did not support the president candidate, they would perceive the former voting rate as lower than the latter, and thus be less likely to support the candidate.

Numerical information of the sort described above can strongly influence consumers’ decision making. The research may provide a useful guide for marketers who want to convey product information in a way that will maximize its impact.

For example, they might choose a relatively large range scale if the target rating score is low, thus increasing its numerical discrepancy from the low scale endpoint. However, they might want to choose a small range scale if the target rating score is high, decreasing the score’s discrepancy from the high scale endpoint.

Authored by Tao Tao. Tao is a PhD student in the Department of Marketing at CUHK Business School. Article courtesy CUHK.

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