Accruals quality and analyst coverage

We provide evidence that analyst coverage increases as accruals quality decreases. This finding is consistent with the services of financial analysts becoming more valuable and in greater demand as accruals provide weaker signals about future cash flows. Further, it is accruals quality associated with innate uncertainty in the firm’s operating environment that attracts analysts even after controlling for operating uncertainty associated with cash flow and stock return volatility. This suggests that low quality accruals provide an opportunity for analysts to benefit from generating private information. Consistent with analysts providing compensating information, we find that forecasts for firms with lower accruals quality contain more private information.     

Strength of analyst coverage following IPOs

Firms with poor aftermarket performance are given higher target prices and are more likely to receive strong buy recommendations, especially by analysts affiliated with the lead underwriter. This favorable coverage is relatively short lived, typically lasting less than six months. Controlling for the quantity of coverage received, stock prices of newly public firms increase more when the target price ratio is high and recommendation is a strong buy. These results suggest that when a firm goes public, underwriter-affiliated analysts provide protection in the form of “booster shots” of stronger coverage if the firm experiences poor aftermarket stock performance.     

Investor attention,information acquisition,and value premium: A mispricing perspective

This paper investigates the impact of investor attention on the dynamics of the value premium. We find superior return differences to value-growth strategy conditioned as low degree of investor attention. In contrast, return differences to the value-growth strategy conditioned as high investor attention are indifferent from zero. We show that return differences to low degree of investor attention across value and growth firms are attributed to mispricing explanation using common risk factors, mispricing factors, sentiment analysis, multivariate analysis, and market expectation errors approach. The findings suggest that investor attention contributes to generating superior return differences to standard value-growth strategy. Our finding concludes that long-short investment strategy in value stocks and growth stocks conditioned as low investor attention generate superior value premium.     

Bank earnings management and analyst coverage: evidence from loan loss provisions

Review of Quantitative Finance and Accounting - We investigate whether there are information transfers related to the narratives accompanying earnings announcements in the same way there are for...     

Investor attention in cryptocurrency markets

We examine the relationship between investor attention, and measures of uncertainty, with the market dynamics of Bitcoin and other cryptocurrencies. We find that increases in investor attention are associated with higher returns, more volatility, and greater illiquidity in cryptocurrency markets. In contrast, cryptocurrency uncertainty (UCRY) and financial market uncertainty (VIX) are also positively related to volatility and illiquidity but have a negative contemporaneous relationship with returns. The identified relationships are accentuated during the COVID-pandemic, and are robust to different measures of investor attention, volatility, and illiquidity. Our results suggest that monitoring investor attention could assist both investors and policymakers.     

Air pollution and analyst information production

Recent studies investigate the impact of air pollution on labor productivity. We extend this literature by showing that air pollution negatively affects equity analyst information production. Analysts exposed to air pollution are less likely to issue timely forecasts or improve their forecast accuracy. Investigating the underlying mechanism, we find that analysts exposed to air pollution are less likely to provide bold (especially, negatively bold) forecasts. We also find evidence that market pricing is less sensitive to forecast revisions issued by analysts exposed to air pollution. Our results are robust to controlling for firm/analyst and time fixed effects, as well as additional specifications employing difference-in-differences designs and placebo tests.     

Stock price synchronicity and analyst coverage in emerging markets

This paper examines the relation between the stock price synchronicity and analyst activity in emerging markets. Contrary to the conventional wisdom that security analysts specialize in the production of firm-specific information, we find that securities which are covered by more analysts incorporate greater (lesser) market-wide (firm-specific) information. Using the R² statistics of the market model as a measure of synchronicity of stock price movement, we find that greater analyst coverage increases stock price synchronicity. Furthermore, after controlling for the influence of firm size on the lead–lag relation, we find that the returns of high analyst-following portfolio lead returns of low analyst-following portfolio more than vice versa. We also find that the aggregate change in the earnings forecasts in a high analyst-following portfolio affects the aggregate returns of the portfolio itself as well as those of the low analyst-following portfolio, whereas the aggregate change in the earnings forecasts of the low analyst-following portfolio have no predictive ability. Finally, when the forecast dispersion is high, the effect of analyst coverage on stock price synchronicity is reduced.     

The incremental impact of analyst initiation of coverage

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.     

Investor attention, overconfidence and category learning

Motivated by psychological evidence that attention is a scarce cognitive resource, we model investors’ attention allocation in learning and study the effects of this on asset-price dynamics. We show that limited investor attention leads to category-learning behavior, i.e., investors tend to process more market and sector-wide information than firm-specific information. This endogenous structure of information, when combined with investor overconfidence, generates important features observed in return comovement that are otherwise difficult to explain with standard rational expectations models. Our model also demonstrates new cross-sectional implications for return predictability.     

Twitter activity,investor attention,and the diffusion of information

We examine the impact of Twitter attention on stock prices by examining over 21 million company‐specific tweets over a 5‐year period. Through a quasi‐natural experiment identifying official Twitter outages, we find that Twitter influences stock trading, especially among small, less visible securities primarily traded by retail investors. In addition, we determine that Twitter activity is associated with positive abnormal returns and when tweets occur in conjunction with traditional news events, more information is spread to investors. Finally, we show that retail investor activity drives the Twitter effect as institutional investors less actively trade the affected stocks.     

Investor attention and cryptocurrency: Evidence from wavelet-based quantile Granger causality analysis

This paper investigates the relationship between investor attention and the major cryptocurrency markets by wavelet-based quantile Granger causality. The wavelet analysis illustrates the interdependence between investor attention and the cryptocurrency returns. Multi-scale quantile Granger causality based on wavelet decomposition further demonstrates bidirectional Granger causality between investor attention and the returns of Bitcoin, Ethereum, Ripple and Litecoin for all quantiles, except for the medium. Among them, the Granger causality from investor attention to the returns is relatively very weak for Ethereum. In the short term, the Granger causality from these cryptocurrency returns to investor attention seems symmetric, but in the medium- and long- term, the causality shows some asymmetry. The Granger causality from investor attention to these cryptocurrency returns is asymmetric and varies across cryptocurrencies and time scales. Specifically, investor attention has a relatively stronger impact on the cryptocurrency returns in bearish markets than that in bullish markets in the short term.     

Product market competition,competitive strategy,and analyst coverage

This paper examines how product market competition and strategic interactions among peer firms influence analyst coverage. First, we hypothesize that product market competition increases both the demand and supply of analyst coverage. Using three variations of industry concentration ratios and a firm specific measure of competition, we test and find a positive and significant effect of market competition on analyst coverage. Second, we explore an information transfer channel through which product market affects analyst coverage. We hypothesize that information flows more freely among firms selling similar products. Such information flows lowers analyst information collection and processing costs, which in turn increases analyst coverage. Using product similarity index developed by Hoberg and Phillips (J Polit Econ 124(5):1423–1465, 2016) to capture the effect of information transfer, we find that analyst coverage increases with product similarity. Third we examine the role of competitive strategy in analyst coverage. We split our sample into markets of strategic complements and strategic substitutes. We find that the effect of market competition and analyst coverage is more pronounced in markets where firms compete as strategic complements.     

Ownership,analyst coverage,and stock synchronicity in China

This study examines how ownership structure affects the information environment of publicly traded firms in China. We hypothesize that concentrated ownership and the associated separation of ultimate control and ownership rights create agency conflicts between controlling shareholders and minority investors leading controlling owners to withhold firm-specific information from the market. We test this hypothesis by analyzing the effect of ultimate ownership structure and analyst coverage on stock return synchronicity. We find that a greater separation of control and ownership rights increases the response coefficient of stock return synchronicity to analyst coverage. This result is robust to endogeneity, a series of robustness checks, and an alternative hypothesis based on noise trading. The incentive of controlling owners to limit firm transparency thus leads analysts to disseminate more market-wide information.     

The bright side of analyst coverage on corporate innovation: Evidence from China

Using a sample of A-share listed companies in China from 2007 to 2019, we investigate the effect of analyst coverage on corporate innovation. We find that analyst coverage will promote corporate innovation, supporting the information hypothesis. We also discuss possible mechanisms of how analyst coverage increases innovation. The information and monitor effects are two plausible channels that allow analyst coverage to promote innovation. Heterogeneity analysis shows the positive relation is more pronounced in non-SOEs, in higher intellectual property protection regions. And considering the firms' life cycle, we find firms in the growth and maturity stage are more vulnerably affected by analysts. Further investigation reveals a positive relationship between analyst coverage and external innovation, and the increased innovation ultimately translates into the long-term value of firms. Our research enriches the impact of analyst coverage on innovation and provides new empirical evidence to improve the multi-level capital market.     

Environmental performance and analyst information processing costs

This study tests whether the information processing costs of analysts vary positively with the environmental performance information available on the firms they follow. Consistent with this conjecture, we find that these costs increase when analysts process a wider array of environmental performance ratings. Specifically we find that as the number of environmental performance ratings increases, analysts cover fewer firms in their portfolio, provide fewer earnings-per-share (EPS) forecast revisions, and make less timely forecast revisions. Two additional tests confirm that our results relate to environmental performance information and not to confounding factors. First, the “shock” of the Global Warming Solutions Act of 2006 implemented for California firms in 2012 increases analyst information processing costs incremental to the main effect of environmental performance ratings. Second, analyst information processing costs increase further in the year a firm covered by an analyst provides a CSR report for the first time. Our results have implications for firm managers considering voluntary environmental disclosure and investors deciding on what stocks to include in their socially responsible portfolios because when processing costs are high, analysts will provide less information or less timely information, resulting in more gradual price discovery in capital markets.     

Investor overlap and diffusion of disclosure practices

I develop and test an investor demand-driven explanation for why one firm’s change in voluntary disclosure behavior is emulated by some firms in the industry but not others. I focus on the overlap in institutional investor ownership between two firms as a mechanism by which a first-mover firm’s increase in disclosure prompts investors to seek a similar increase from a follower firm. Using 10-K market risk disclosures as my empirical setting, I find that a firm’s decision to follow a first mover in providing more quantitative information than is required by the SEC is positively associated with an increase in investor overlap from the prior year. I also find that the association is stronger for overlap in large institutional investors, consistent with their greater influence over managers, and for firms where investor uncertainty is high. This association is found after controlling for the herding effect documented in prior studies and after addressing potential endogeneity concerns. Overall, this evidence provides new insight into patterns of intra-industry disclosure behavior and highlights investor overlap as a communication channel and feedback mechanism that helps facilitate the diffusion of disclosure practices.     

The impact of corporate tax avoidance on analyst coverage and forecasts

Review of Quantitative Finance and Accounting - Corporate tax avoidance is likely to be associated with a high level of earnings management and with high financial opacity in the time-series. On...     

Business strategy,stock price informativeness,and analyst coverage efficiency

We examine how business strategy affects stock price informativeness which in turn influences analyst coverage efficiency. Using stock price synchronicity and the probability of informed trading as proxies for stock price informativeness, we show that stock prices of prospectors are less informative than those of defenders. Next, we explore two channels through which business strategy influences analyst coverage efficiency. We first test and find support for an information transfer channel, i.e., the higher stock price synchronicity of prospectors facilitates more information transfer by analysts, resulting in higher analyst coverage efficiency of prospectors than defenders. Next, we test and find support for an informed trading channel, i.e., the higher probability of informed trading on stocks of defenders intensifies competition between informed traders and analysts. Such competition adversely affects analyst coverage efficiency, leading to lower analyst coverage efficiency of defenders than prospectors. Our findings are robust to an array of robustness checks including 2SLS/IV tests, differences‐in‐difference tests, and high‐tech industry sensitivity analyses.     

Are there long-run implications of analyst coverage for IPOs?

Analyst coverage has been cited increasingly as an important attribute in the selection of an underwriter for a firm about to go public. However, it has also been alleged that affiliated analysts provide biased research. In this study, we examine these interrelated issues by examining the long-run performance of IPOs with coverage from their managing underwriters in a 1993–2003 sample. We find that (1) analysts’ research coverage from their managing syndicate is not related to long-run performance; (2) long-run performance is not different for firms that receive all-star analyst coverage; and (3) investors are not systematically worse off for following lead underwriter recommendations.     

Investor attention,aggregate limit-hits,and stock returns

We develop a simple measure of investor attention by aggregating the number of days that a stock hits the upper or lower limit on a monthly basis. This attention proxy describes investor trading behavior and contains information of future stock returns. Using data from the Chinese equity market from 2002 to 2017, we provide extensive evidence that the investor attention captured by our measure negatively predicts cross-sectional stock returns, and the long–short trading strategy based on this attention measure produces significant economic value. We argue that the attention-motivated trading is the main cause behind the return predictability of aggregate limit-hits.