Analyst Coverage Initiations on Previously Uncovered Stocks
40 Pages Posted: 4 Sep 2005
Date Written: August 29, 2005
We examine 331 analyst coverage initiations for firms that have been publicly traded for at least a year with no analyst coverage during 1997-2003. The average short-term market response to initiation announcements is 5.17 percent and is followed by an additional eight percent abnormal return in the subsequent three months. The magnitude of this valuation increase depends on the strength of the rating and the type of firm initiating coverage. Initiation announcement returns and the post-initiation returns are the least positive when the initiation is provided by analysts that are employed by firms that receive a direct fee for coverage or have had a prior investment banking relationship with the covered firm. Finally, while analyst initiations are associated with increases in trading volume that are correlated with stock price increases, when we control for the endogenous nature of the coverage decision we find no evidence that significant price increases are caused by liquidity enhancement.
Keywords: Analyst coverage, analyst initiation, neglected firms, uncovered stocks, liquidity hypothesis, underwriting relationship, brokerage firms, fee-based research, affiliated analysts
JEL Classification: G10, G11, G14
Suggested Citation: Suggested Citation