Uncovering expected returns: Information in analyst coverage proxies
Name
LeeSo_20160503.pdf
Description
Accepted version
Size
1.2 MB
Format
Adobe PDF
Checksum (MD5)
84b697b82d5bb6a037a35466ee2ec370
Author(s)
Lee, Charles M.C.
So, Eric
Date Issued
May 2017
Journal
Journal of Financial Economics
Publisher
Elsevier BV
Citation
Lee, Charles M. C. and Eric C. So. "Uncovering expected returns: Information in analyst coverage proxies." Journal of Financial Economics 124, 2 (May 2017): 331-348 © 2017 Elsevier
Version
Author's final manuscript
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
MIT Department
Sloan School of Management
Terms of Use
Creative Commons Attribution-Noncommercial-Share Alike
Persistent DSpace Link
DOI of Published Version
https://doi.org/10.1016/j.jfineco.2017.01.007
