Can Companies Buy Credible Analyst Research?

Abstract:     
The benefits of analyst coverage are well documented but the majority of publicly traded companies do not have coverage. In this paper, I explore a controversial mechanism recommended by an SEC advisory committee by which companies can acquire coverage - paying for it.

I find firms that pay for research have greater future performance uncertainty, higher information asymmetry, and lower visibility. I find that 2-day cumulative abnormal returns are significantly related to the issuance of paid-for reports suggesting they have information content for investors despite the inherent conflicts of interest. After the initiation of coverage, companies experience an increase in liquidity, institutional ownership, and sell-side analyst following.

However, paid-for coverage is neither a perfect substitute for sell-side coverage nor unconditionally valuable. Paid-for analysts issue relatively less accurate forecasts and more optimistic recommendations than sell-side analysts. In addition, the results are strongest for fee-based research firms with ex ante policies that reduce potential conflicts of interest and enhance credibility.

Keywords: Analyst coverage, voluntary disclosure, capital markets, credibility

JEL Classifications: G12, G29, G24, G32, G34, M41

Working Paper Series