Are All Security Analysts Equal?

Abstract

We examine the extent to which security analysts are homogeneous in their effect on firm valuation as measured by Tobin's Q. Earlier research documents a significant and positive relation between analyst coverage and firm valuation. We identify three classes of equity analysts and examine their differential effect on firm valuation associated with their coverage and their information production. The findings in our paper are that equity analysts are not homogeneous in their effect on firm valuation. We discover the presence of analysts at national securities firms have the strongest effect on firm valuation followed by analysts at regional securities firms and finally analysts at non-brokerage/research firms. We attribute this result to the differential monitoring and information dissemination function rendered by the analysts. Information produced by analysts, however, does not share the same credibility. Specifically, we find brokerage firms' buy recommendations are discounted by the market and have a weak effect on firm valuation. The results can be supported by arguments that brokerage firm analysts' recommendations are contaminated by their firms' investment banking relations with corporations.

JEL Classification: G14, G24, G32