Does Common Analyst Coverage Explain Excess Comovement?

51 Pages Posted: 4 Apr 2010 Last revised: 26 Feb 2016

Ryan D. Israelsen

Indiana University - Kelley School of Business - Department of Finance

Date Written: August 8, 2014

Abstract

This paper shows that a largely-ignored source of commonality - correlated errors in news about fundamentals - is an important, rational determinant of excess comovement. Individual analysts' forecast errors tend to be correlated across stocks. Using a proxy for correlated forecast errors based on analyst coverage, I find that stocks with similar sets of analysts exhibit more excess comovement - controlling for industry and other variables. Exogenous changes in commonality in analyst coverage around (1) brokerage firm mergers and (2) additions to an index lead to changes in excess comovement. This information channel can explain 10% to 25% of the increase in comovement around additions to the S&P500 index.

Keywords: Analyst Coverage, Comovement, Excess Comovement, Information, Learning, S&P500, Social Networks, Stock Returns, Earnings Forecasts, Earnings, Forecasts, Correlation, Style Investors

JEL Classification: D83, G12, G14, G24

Suggested Citation

Israelsen, Ryan D., Does Common Analyst Coverage Explain Excess Comovement? (August 8, 2014). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming; AFA 2012 Chicago Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1584002 or http://dx.doi.org/10.2139/ssrn.1584002

Ryan D. Israelsen (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

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