Analyst Coverage and Intangible Assets
Posted: 1 Mar 1998
This study examines the relation between analyst coverage and the extent to which accounting amounts reflect the value of firms' intangible assets. We hypothesize that more analysts cover firms whose share prices are less than completely informative about the firms' fundamental values because analysts' private information acquisition activities yield more profitable investment recommendations for such firms. Firms with significant intangible assets likely have less informative prices than do other firms because intangible assets generally are not recognized nor are estimates of fair values for these assets disclosed. Therefore, we expect that analysts will allocate more resources to covering these firms than firms whose values are well captured by recognized assets. To investigate the relation between analyst coverage and unrecognized intangible assets, we develop an empirical model of analyst coverage that depends on accounting variables and other variables that control for analysts' non-accounting incentives to cover firms. The accounting variables are designed to reflect various types of unrecognized intangible assets, such as research and development and brand names. We also hypothesize that analyst coverage will be greater for firms analysts perceive to be undervalued, and less for firms that require greater effort by analysts to follow.
Our findings indicate that coverage is significantly greater for firms with greater research and development and advertising expenses relative to their industry, and for firms in industries with greater research and development expense. Contrary to our predictions, the estimated coefficients on firm and industry-level recognized intangible assets and depreciation expense have unpredicted signs, although they are not always significantly different from zero. We also find, as predicted, that analyst coverage is greater for firms that analysts perceive to be undervalued and for firms that require less analyst effort to follow. Also, we hypothesize and find that analyst coverage is increasing in firm size, sales growth, the trading volume of a firm's shares, the frequency of a firm's access to public debt and equity markets, and the number of other firms in the industry, and decreasing in earnings variability.
JEL Classification: G12, G29, M41, M44
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