Uncovering Expected Returns: Information in Analyst Coverage Proxies

Charles Lee and Eric C. So
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Eric C. So: MIT

Research Papers from Stanford University, Graduate School of Business

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.

JEL-codes: G10 G11 G12 G14 M40 M41 (search for similar items in EconPapers)
Date: 2016-01
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Citations: View citations in EconPapers (1)

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Journal Article: Uncovering expected returns: Information in analyst coverage proxies (2017)
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