The value impact of analyst coverage

Official URL: http://dx.doi.org/10.1108/14757701011068084

Purpose – The purpose of this study is to investigate the value of analyst coverage on the covered firms. Design/methodology/approach – To isolate the value impact of analyst coverage, the study focuses on a unique set of firms that receive analyst coverage for the first time after having been traded in an exchange for at least one year. Event study and ordinary least square regressions are used to test the hypotheses. Findings – There is a significant and positive price reaction at the time of the announcement of analyst coverage initiations. However, unlike the coverage initiations around the initial public offers (IPOs), the price impact is not related to the reputation of the analyst firm, the exchange listing or whether the analyst firm is also the IPO underwriter. The sample firms do not experience significant reduction in the level of information asymmetry but experience a significant increase in liquidity. The increase in liquidity only occurs after the coverage initiations. The increase in liquidity is not explained by the increase in institutional investors' interest. Finally, the price impact around a coverage initiation is positively related to the change in liquidity. Practical implications – The findings suggest that firms benefit from analyst coverage through an improvement in liquidity. Originality/value – This is the first study to focus on the analysts' first-time coverage initiations. It argues that focusing on the first-time coverage initiations provides a better analysis of the effects of analyst activities on the firm value.