Investor Attention and the Cross-Section of Analyst Coverage

45 Pages Posted: 29 Apr 2019 Last revised: 16 Sep 2021

See all articles by Charles Martineau

Charles Martineau

University of Toronto - Rotman School of Management and UTSC Management

Marius Zoican

University of Toronto at Mississauga - Department of Management; University of Toronto - Rotman School of Management

Date Written: September 15, 2021

Abstract

Investor attention strongly correlates with analyst coverage. Between 2012-2019, institutional investor attention explains 19.42% of the cross-sectional variation in analyst coverage, second only to market capitalization (22.64%). We build a model where cognitive constraints for investors jointly drive equilibrium attention and coverage choices. Analysts compete for scarce investor attention to maximize volume for brokerages. Analyst coverage is clustered in stocks with large uninformed trading volume (high noise), for which information signals are marginally more valuable. The rationale is that institutional investors can trade more aggressively in high noise stocks without revealing their information through clearing prices. Relaxing investors' attention constraints reinforce coordination motives for analysts, leading to even higher coverage clustering. The results mirror ``crowded'' coverage in the U.S., where the most-covered 5% equities amount to 25% of earnings forecasts.

Keywords: retail trading, analyst coverage, price impact, investor attention, learning

JEL Classification: G11, G24, G40, D83, M41

Suggested Citation

Martineau, Charles and Zoican, Marius, Investor Attention and the Cross-Section of Analyst Coverage (September 15, 2021). Available at SSRN: https://ssrn.com/abstract=3376162 or http://dx.doi.org/10.2139/ssrn.3376162

Charles Martineau

University of Toronto - Rotman School of Management and UTSC Management ( email )

105 St-George
Toronto, Ontario M5S3E6
Canada

HOME PAGE: http://charlesmartineau.com

Marius Zoican (Contact Author)

University of Toronto at Mississauga - Department of Management ( email )


Canada

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

HOME PAGE: http://www.mariuszoican.org

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