Discounted Stocks and Excess Analyst Coverage

25 Pages Posted: 3 Nov 2008

See all articles by John A. Doukas

John A. Doukas

Old Dominion University - Strome College of Business

Chansog (Francis) Kim

The State University of New York at Stony Brook

Christos Pantzalis

University of South Florida

Multiple version iconThere are 2 versions of this paper

Date Written: January 2002

Abstract

In this paper we examine whether the negative excess value of stocks (stock discounts in the Berger and Ofek (1995) spirit) is associated with low excess analyst coverage over the 1979-1997 period. We define excess analyst coverage as the difference between a firm's actual analyst following and its imputed coverage. We hypothesize that firms with high excess (low) analyst coverage are exposed to less (more) information asymmetry between managers and investors, managerial misconduct and uncertainty about future earnings than do other firms. Therefore, stocks with low excess analyst coverage profile are expected to trade at low prices as they would be more difficult for investors to value. Our findings provide evidence in support of the view that excess analyst coverage explains a significant portion of stocks discount, indicating that higher (lower) excess analyst coverage leads to more (less) informative stock prices and offers an information-based explanation on why stocks trade at a premium (discount). Our empirical results are also consistent with the notion that stocks of firms with high managerial power (i.e., low investor rights/weak corporate governance) trade at a discount. Finally, our analysis indicates that the information inherent in the dispersion of analyst forecasts, a surrogate for investor uncertainty, plays an important role in the determination of asset prices.

Suggested Citation

Doukas, John A. and Kim, Chansog (Francis) and Pantzalis, Christos, Discounted Stocks and Excess Analyst Coverage (January 2002). NYU Working Paper No. FIN-02-005. Available at SSRN: https://ssrn.com/abstract=1293669

John A. Doukas (Contact Author)

Old Dominion University - Strome College of Business ( email )

2080 Constant Hall
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Norfolk, VA 23529-0222
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757-683-5521 (Phone)

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Chansog (Francis) Kim

The State University of New York at Stony Brook ( email )

College of Business
Stony Brook, NY 11794
United States
5163040037 (Phone)
631-632-9412 (Fax)

Christos Pantzalis

University of South Florida ( email )

Tampa, FL 33620-5500
United States
(813) 974-3262 (Phone)

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