Supply Shortages in Sell-Side Analyst Coverage

Abstract

In this paper we argue that the lack of an explicit price for sell-side research leads to shortages of
research supply in response to shocks to the cost of covering a firm. Using changes in firm-specific
uncertainty due to CEO turnovers we document a 9% reduction in analysts' coverage relative to
comparable companies. We confirm our findings using alternative sources of uncertainty (filings of
securities class actions and industry shocks). Focusing on individual analysts, we show that the
probability of dropping coverage is higher for younger analysts, analysts with lower reputation and
higher workloads, factors that indicate higher career concerns and higher marginal production cost.

Keywords: Financial Analysts, Career Concerns, soft-dollar agreement.

JEL Classification: G11, G14, G23