Uncovering expected returns: Information in analyst coverage proxies

Charles Lee and Eric C. So

Journal of Financial Economics, 2017, vol. 124, issue 2, 331-348

Abstract: We show that analyst coverage proxies contain information about expected returns. We decompose analyst coverage into abnormal and expected components using a simple characteristic-based model and show that firms with abnormally high analyst coverage subsequently outperform firms with abnormally low coverage by approximately 80 basis points per month. We also show abnormal coverage rises following exogenous shocks to underpricing and predicts improvements in firms’ fundamental performance, suggesting that return predictability stems from analysts more heavily covering underpriced stocks. Our findings highlight the usefulness of analysts’ actions in expected return estimations, and a potential inference problem when coverage proxies are used to study information asymmetry and dissemination.

Keywords: Analysts; Expected returns; Anomalies; Coverage; Measurement error; Return predictability (search for similar items in EconPapers)
JEL-codes: G10 G11 G12 G14 M40 M41 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (52)

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Working Paper: Uncovering Expected Returns: Information in Analyst Coverage Proxies (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:124:y:2017:i:2:p:331-348

DOI: 10.1016/j.jfineco.2017.01.007

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