What is the Value of Sell-Side Analysts? Evidence from Coverage Initiations and Terminations
48 Pages Posted: 28 Jul 2015 Last revised: 1 Sep 2015
Date Written: August 31, 2015
We investigate three potential channels of analyst value creation: improving fundamental performance through monitoring, reducing information asymmetry, and increasing investor recognition. We show that changes in investor recognition have consistent explanatory power for the market reaction to coverage initiations and terminations but find mixed evidence for changes in information asymmetry and no evidence for changes in fundamental performance as determinants of the market reaction. These results suggest that analysts create value for firms under their coverage by improving their investor recognition and not by monitoring or reducing information asymmetry.
Keywords: Coverage initiation, exogenous coverage termination, firm value, investor recognition, information asymmetry
JEL Classification: G14, G24, G29, G32
Suggested Citation: Suggested Citation