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Photo courtesy of Yonhap News |
[Alpha Biz= Paul Lee] A recent study has raised new concerns about the reliability and objectivity of equity research in South Korea, revealing that domestic securities analysts overwhelmingly issue “Buy” ratings—while the number of analysts continues to decline and forecast accuracy deteriorates.
According to the Korea Capital Market Institute (KCMI), 93.1% of investment ratings published by South Korean analysts between 2020 and 2024 were classified as either Buy or Strong Buy. In stark contrast, Sell ratings accounted for just 0.1%, and rating changes were extremely rare—just 2.5% of all reports involved a revised recommendation.
This trend marks a sharp shift from earlier decades:
In 2000–2009, Buy and Strong Buy ratings made up 67.3% of total reports
In 2010–2019, the figure jumped to 89.6%
From 2020 onward, the proportion has surpassed 90%
Despite a significant expansion in Korea’s equity markets over the past decade—with market capitalization increasing by KRW 900 trillion and over 700 new listings—the number of active analysts has declined from 600 to just over 400, reflecting both quantitative and qualitative regression in the research ecosystem.
Dr. Junseok Kim, lead author of the study and a senior research fellow at KCMI, noted that analysts covering the same firms consistently over time tended to show even higher “Buy” ratios and fewer rating changes.
The report identifies conflicts of interest as a primary factor behind the optimism bias. Given their dual role in research and client-facing operations, analysts are often reluctant to publish negative views on companies that may also be investment banking clients or are widely held by institutional investors.
"Intermediary-related conflicts are especially prominent in Korea," Dr. Kim said. "Since most analyst compensation is indirectly tied to brokerage services and institutional investor engagement, objectivity is compromised."
Indeed, firms with higher reliance on brokerage revenue were found to issue more “Buy” ratings, but those stocks were less likely to meet price targets, according to the study.
Analysts were also found to issue overly optimistic price targets. From 2020 onward, the expected return based on target prices averaged 36.1%, while the actual realized return was just 11.5%. Excluding the 2020 market rally during the pandemic, actual returns dropped to –2.9%, with an average forecast error of 39.7%.
The research further suggests that as analysts are assigned a greater number of companies, the likelihood of issuing “Buy” ratings increases and forecast accuracy declines. The number of brokerages publishing equity reports has also fallen, from 36 firms a decade ago to 30 today.
Dr. Kim concluded, “As a cornerstone of capital market infrastructure, analysts play a vital role in evaluating corporate performance and governance. The erosion of their credibility and influence is deeply concerning.” He recommended regulatory reforms such as unbundling brokerage and research fees to mitigate conflicts of interest and restore trust in the industry.
AlphaBIZ Paul Lee(hoondork1977@alphabiz.co.kr)
