Professor Eric So, from MIT, will be the Finance Seminar speaker onFriday, October 09, 2015. Eric will present his paper titled “Uncovering Expected Returns: Information in Analyst Coverage Proxies.”
The seminar will be held at Yale School of Management from 11:35am – 12:55pm in EVANS 4200 located at 165 Whitney Avenue.
Lunch will be served at 11:30am. We hope you can attend!
Uncovering Expected Returns:Information in Analyst Coverage Proxies
Eric C. So
Massachusetts Institute of Technology
Sloan School of Management
September 2015
Abstract
This study demonstrates that standard analyst coverage proxies contain information about firm-level expected returns. I decompose analyst coverage proxies into abnormal and expected components using a simple characteristic-based model and show that firms with abnormally high coverage outperform firms with abnormally low coverage by approximately 80 basis points per month. Abnormal analyst coverage also predicts
firms’ earnings news, suggesting analysts allocate coverage by anticipating changes in firms’ future profitability. Using mutual fund flows as an exogenous shock to firm-level mispricing, I also show analysts increase coverage for stocks that appear underpriced.Together, these findings indicate analysts allocate resources across firms in proportion
to their expected returns, which makes analyst coverage reflective of expected returns and thus a noisy measure of information asymmetry and dissemination.
JEL Classifications: G10, G11, G12, G14, M40, M41
