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The Five Stages of Analyst Careers: Coverage Choices and Changing Influence

45 Pages Posted: 24 Aug 2009 Last revised: 13 Nov 2009

Yinghua Li

Arizona State University (ASU) - School of Accountancy

P. Raghavendra Rau

University of Cambridge

Jin Xu

Virginia Tech - Pamplin College of Business

Date Written: August 24, 2009

Abstract

We examine changes in analysts’ monitoring incentives and effectiveness as they progress along their career paths. We find that analysts are less likely to be elected all-stars in the annual Institutional Investor elections when the firms they covered in the year prior to the election have high absolute abnormal accruals. Consistent with the hypothesis that career concerns play an important role in their coverage decisions, up and coming analysts strategically choose firms to cover. Specifically, they drop firms with high earnings management and replace them with low earnings management firms. Once they are elected all-stars and become established in their careers, they replace low earnings management firms with high earnings management firms. Firms that gain all-star coverage reduce earnings management. In addition, investors value recommendation downgrades by all-stars significantly more than downgrades by incipient stars or ex-stars, suggesting that that analyst visibility/influence, rather than analyst innate ability, is the underlying source of the effective monitoring of star analysts.

Keywords: Analyst monitoring, earnings management, analyst coverage, career concerns, all-star analysts

JEL Classification: G34, M41, G24

Suggested Citation

Li, Yinghua and Rau, P. Raghavendra and Xu, Jin, The Five Stages of Analyst Careers: Coverage Choices and Changing Influence (August 24, 2009). Available at SSRN: https://ssrn.com/abstract=1460382 or http://dx.doi.org/10.2139/ssrn.1460382

Yinghua Li

Arizona State University (ASU) - School of Accountancy ( email )

Tempe, AZ 85287
United States
480-965-5188 (Phone)

HOME PAGE: http://my.wpcarey.asu.edu/directory/people/profile.cfm?person=2255159

P. Raghavendra Rau (Contact Author)

University of Cambridge ( email )

Cambridge Judge Business School
Trumpington Street
Cambridge, Cambridgeshire CB21AG
United Kingdom
3103626793 (Phone)

HOME PAGE: http://www.raghurau.com/

Jin Xu

Virginia Tech - Pamplin College of Business ( email )

Department of Finance
880 West Campus Dr
Blacksburg, VA 24061
United States

HOME PAGE: http://www.finance.pamplin.vt.edu/jin-xu/

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