Uncovering Expected Returns: Information in Analyst Coverage Proxies

43 Pages Posted: 27 Jan 2016 Last revised: 16 Jun 2016

See all articles by Charles M.C. Lee

Charles M.C. Lee

Stanford University - Graduate School of Business

Eric C. So

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: June 15, 2016

Abstract

We show that analyst coverage proxies contain information about expected returns. We decompose analyst coverage into abnormal and expected components using a simple characteristic-based model and show that firms with abnormally high analyst coverage subsequently outperform firms with abnormally low coverage by approximately 80 basis points per month. We also show abnormal coverage rises following exogenous shocks to underpricing and predicts improvements in firms' fundamental performance, suggesting that return predictability stems from analysts more heavily covering underpriced stocks. Our findings highlight the usefulness of analysts' actions in expected return estimations, and a potential inference problem when coverage proxies are used to study information asymmetry and dissemination.

Keywords: expected returns, analysts, mispricing

JEL Classification: G10, G11, G12, G14, M40, M41

Suggested Citation

Lee, Charles M.C. and So, Eric C., Uncovering Expected Returns: Information in Analyst Coverage Proxies (June 15, 2016). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2723439 or http://dx.doi.org/10.2139/ssrn.2723439

Charles M.C. Lee (Contact Author)

Stanford University - Graduate School of Business ( email )

Stanford Graduate School of Business
655 Knight Way
Stanford, CA 94305-5015
United States
650-721-1295 (Phone)

Eric C. So

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

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