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

See all articles by Kevin K. Li

Kevin K. Li

Santa Clara University

Haifeng You

Hong Kong University of Science & Technology (HKUST) - Department of Accounting

Date Written: August 31, 2015

Abstract

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

Li, Kevin K. and You, Haifeng, What is the Value of Sell-Side Analysts? Evidence from Coverage Initiations and Terminations (August 31, 2015). Journal of Accounting & Economics (JAE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=2636643 or http://dx.doi.org/10.2139/ssrn.2636643

Kevin K. Li

Santa Clara University ( email )

500 El Camino Real
Santa Clara, CA 95053
United States

Haifeng You (Contact Author)

Hong Kong University of Science & Technology (HKUST) - Department of Accounting ( email )

Clear Water Bay
Kowloon
Hong Kong

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