The Two Faces of Analyst Coverage

• Published in: Financial management Vol. 34; no. 2; pp. 99 - 125
• Main Authors: Doukas, John A., Kim, Chansog (Francis), Pantzalis, Christos
• Format: Journal Article
• Language: English
• Published: Oxford, UK Blackwell Publishing Ltd 01.06.2005; Financial Management Association
• Subjects: Analysts; Analytical estimating; Analytical forecasting; Business structures; Earnings forecasting; Financial portfolios; Industrial market; Investors; Modeling; Rates of return; Stock prices; Stocks; Studies; Trade; Valuation
• ISSN: 0046-3892; 1755-053X
• DOI: 10.1111/j.1755-053X.2005.tb00101.x

We find that positive excess (strong) analyst coverage is associated with overvaluation and low future returns. This finding is consistent with the view that excessive analyst coverage, driven by investment banking incentives and analyst self-interests, raises investor optimism causing share prices to trade above fundamental value. However, weak analyst coverage causes stocks to trade below fundamental values. This finding indicates that investors tend to believe that these firms are more likely to be plagued by information asymmetries and agency problems. The results remain robust after controlling for the possible endogenous nature of analyst coverage and analysts' self-selection bias.