42 Pages Posted: 31 Jan 2007 Last revised: 19 Dec 2008
Date Written: December 15, 2008
Contrary to concerns about the equity research analysis industry's perceived decline, we find that both the amount of coverage and the precision of earnings estimates have increased over the past twenty-four years. We also study how the stock market behaves around changes in analyst coverage. We find that firms added (dropped) by analysts have positive (negative) contemporaneous abnormal returns and zero (positive) future abnormal returns. Evidence on the bias of cash flow expectations and divergence of opinions suggests a mispricing rather than a fundamentals explanation. Moreover, the abnormal returns are captured by individuals rather than institutions and are compensation to individuals for holding illiquid stocks.
JEL Classification: G24
Suggested Citation: Suggested Citation
Kecskes, Ambrus and Womack, Kent L., Adds and drops of coverage by equity research analysts (December 15, 2008). Available at SSRN: https://ssrn.com/abstract=960501 or http://dx.doi.org/10.2139/ssrn.960501
By John Graham