The Two Faces of Analyst Coverage
John A. Doukas
Old Dominion University - Strome College of Business
Chansog (Francis) Kim
The State University of New York at Stony Brook
University of South Florida
February 16, 2005
We find that positive excess (strong) analyst coverage is associated with overvaluation and low future returns. This finding is consistent with the view that excessive analyst coverage, driven by investment banking incentives and analyst self-interests, raises investor optimism causing share prices to trade above fundamental value. However, weak analyst coverage causes stocks to trade below fundamental values. This finding indicates that investors tend to believe that these firms are more likely to be plagued by information asymmetries and agency problems. The results remain robust after controlling for the possible endogenous nature of analyst coverage and analysts¿ self-selection bias.
Number of Pages in PDF File: 37
Keywords: Analyst coverage, Mis-pricing
JEL Classification: G10, G11, G12
Date posted: January 8, 2009
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