Analysts’ Selective Coverage and Subsequent Performance of Newly Public Firms

36 Pages Posted: 9 Jul 2010 Last revised: 14 Jul 2010

See all articles by Re-Jin Guo

Re-Jin Guo

University of Illinois at Chicago - Department of Finance

Somnath Das

University of Illinois at Chicago

Huai Zhang

Nanyang Technological University (NTU)

Date Written: May 1, 2006

Abstract

This study examines the ability of analysts to forecast future firm performance, based on the selective coverage of newly public firms. We hypothesize that the decision to provide coverage contains information about an analyst’s underlying expectation of a firm’s future prospects. We extract this expectation by obtaining residual analyst coverage from a model of initial analyst following.We document that in the three subsequent years, initial public offerings with high residual coverage have significantly better returns and operating performance than those with low residual coverage. This evidence indicates analysts have superior predictive abilities and selectively provide coverage for firms about which their true expectations are favorable.

Keywords: Analyst Coverage, Initial Public Offering, Long-term Performance

Suggested Citation

Guo, Re-Jin J. and Das, Somnath and Zhang, Huai, Analysts’ Selective Coverage and Subsequent Performance of Newly Public Firms (May 1, 2006). Journal of Finance, Vol. 61, No. 3, pp 1159 –1185, Available at SSRN: https://ssrn.com/abstract=302945

Re-Jin J. Guo (Contact Author)

University of Illinois at Chicago - Department of Finance ( email )

2431 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
United States
312-413-3718 (Phone)

Somnath Das

University of Illinois at Chicago ( email )

601 South Morgan Street
University Hall, Room 2303
Chicago, IL 60607
United States
312-996-4482 (Phone)
312-996-4520 (Fax)

Huai Zhang

Nanyang Technological University (NTU) ( email )

Nanyang Business School
50 Nanyang Ave.
Singapore, 639798
Singapore
+65-6790-4097 (Phone)

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