Crowded Analyst Coverage
44 Pages Posted: 29 Apr 2019 Last revised: 21 Oct 2019
Date Written: October 20, 2019
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 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.
Keywords: analyst coverage, rational inattention, career concerns, information processing, learning
JEL Classification: G11, G24, G40, D83, M41
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