The Value of Research

45 Pages Posted: 3 Nov 2008  

Bryan T. Kelly

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Alexander Ljungqvist

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Research Institute of Industrial Economics (IFN)

Multiple version iconThere are 2 versions of this paper

Date Written: December 2007

Abstract

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 pricereaction 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 earningsannouncements; 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, Global Settlement

Suggested Citation

Kelly, Bryan T. and Ljungqvist, Alexander, The Value of Research (December 2007). NYU Working Paper No. . Available at SSRN: https://ssrn.com/abstract=1293615

Bryan T. Kelly

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-8359 (Phone)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Alexander Ljungqvist

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street, Suite 9-160
New York, NY 10012-1126
United States
212-998-0304 (Phone)
212-995-4220 (Fax)

HOME PAGE: http://pages.stern.nyu.edu/~aljungqv

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Paper statistics

Downloads
305
Rank
7,496
Abstract Views
1,665