Crowded Stock Coverage
40 Pages Posted: 29 Apr 2019
Date Written: April 22, 2019
Analyst stock coverage is "crowded:" the most-covered 5% U.S. equities amount to 25% of earnings forecasts. Is information supply optimally distributed in financial markets? We build a model where limited-attention investors endogenously learn about securities. Analysts compete for scarce investor attention, providing forecasts that reduce learning costs. Coverage crowding emerges through strategic complementarity effects. For limited investor attention, analysts prefer to share a crowded space rather than "going against the wind" to cover more opaque assets. However, coverage skewness is excessive from the investors' perspective. The implications echo documented patterns: analysts cluster in large stocks with significant intangible assets.
Keywords: analyst coverage, investor attention, information processing, learning, asset pricing
JEL Classification: G11, G14, G23, D83, M41
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