Investor Attention and the Cross-Section of Analyst Coverage
45 Pages Posted: 29 Apr 2019 Last revised: 16 Sep 2021
Date Written: September 15, 2021
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
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