Crowded Analyst Coverage
46 Pages Posted: 29 Apr 2019 Last revised: 23 Mar 2020
Date Written: March 19, 2020
Analyst stock coverage is "crowded:'' the most-covered 5% U.S. equities amount to 25% of earnings forecasts. Coverage clustering persists after controlling for factors commonly associated with analyst following, and correlates with investors' demand for information. Is information supply optimally distributed in markets? We build a model where analysts compete for scarce investor attention, providing forecasts that enhance investor learning. If clearing prices are not perfectly revealing, strategic complementarity effects dominate: analysts prefer to share a crowded space rather than "going against the wind'' to cover relatively neglected assets. As investors' learning capacity increases, analyst coverage clustering is always excessive.
Keywords: analyst coverage, rational inattention, career concerns, information processing, learning
JEL Classification: G11, G24, G40, D83, M41
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