Discounted Stocks and Excess Analyst Coverage
25 Pages Posted: 3 Nov 2008
Date Written: January 2002
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.
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