The Incremental Impact of Analyst Initiation of Coverage

37 Pages Posted: 21 Apr 2003

Abstract

I compare the return surrounding a sell-side analyst's initiation of coverage to the return surrounding a recommendation by an analyst who already covers the stock. The market responds more positively to analysts' initiations than to other recommendations. The incremental price impact of an initiation is 1.02% greater than the reaction to a recommendation by an analyst who already covers the stock. I examine whether the hypothesis that analyst coverage increases liquidity explains this incremental return. I find that liquidity improves after initiations, but that one must extend the liquidity hypothesis in order to fully explain the incremental price impact. Liquidity gains subsequent to analyst initiation depend on the analyst's recommendation. The more positive the initial recommendation, the greater the subsequent liquidity improvement. I also find that the initiation abnormal return correlates with the subsequent improvements in liquidity. Corporations should encourage analyst coverage to capture this liquidity benefit.

Keywords: Sell-side analysts, initiation of coverage, liquidity

JEL Classification: G14, G24

Suggested Citation

Irvine, Paul J., The Incremental Impact of Analyst Initiation of Coverage. Available at SSRN: https://ssrn.com/abstract=361022 or http://dx.doi.org/10.2139/ssrn.361022

Paul J. Irvine (Contact Author)

Neeley School of Business ( email )

Fort Worth, TX 76129
United States

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