The Value of Research

45 Pages Posted: 6 Mar 2008 Last revised: 18 May 2010

See all articles by Bryan T. Kelly

Bryan T. Kelly

Yale SOM; AQR Capital Management, LLC; National Bureau of Economic Research (NBER)

Alexander Ljungqvist

Centre for Economic Policy Research (CEPR); Swedish House of Finance; European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

Date Written: December 16, 2007


We estimate the value added by sell-side equity research analysts and explore the links between analyst research, informational efficiency, and asset prices. We identify the value of research from exogenous changes in analyst coverage. On announcement that a stock has lost all coverage, share prices fall by around 110 basis points or $8.4 million on average. The share price reaction is attenuated the more analysts continue to cover the stock, suggesting that there are diminishing returns to coverage at the margin. The adverse effect of coverage terminations is proportional to the analyst's reputation and experience and to the size of the broker's retail sales force. Exogenous reductions in coverage are followed by: less efficient pricing and lower liquidity; greater earnings surprises and more volatile trading around subsequent earnings announcements; increases in required returns; and reduced return volatility. Simulations suggest investors can trade profitably on the volatility changes. Finally, retail investors sell and large institutional investors buy around coverage terminations, suggesting that different investor clienteles have different demands for analyst research.

Keywords: Sell-side research, Coverage terminations, Informational efficiency, Trading strategies, Global Settlement

JEL Classification: G12, G14, G18, G24

Suggested Citation

Kelly, Bryan T. and Ljungqvist, Alexander and Ljungqvist, Alexander, The Value of Research (December 16, 2007). EFA 2008 Athens Meetings Paper, Available at SSRN: or

Bryan T. Kelly

Yale SOM ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Alexander Ljungqvist (Contact Author)

Centre for Economic Policy Research (CEPR)

United Kingdom

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

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