Analyst Initiations of Coverage

Mer, 27/04/2022 - 11:00 / 12:00

405, Viale Romania

Speaker: Elyashiv Wiedman , Hebrew University of Jerusalem

Abstract

This paper studies the interaction between analysts' initiation of coverage, forecast accuracy, and reputation. We analyze a model where heterogeneous analysts may choose which firm to cover, either firms with or without prior analyst coverage, and then issue earnings forecasts for the firm. While past literature focused on forecast accuracy to identify analysts' abilities, we demonstrate that investors' beliefs about analysts' abilities, i.e., reputation, may not be monotonic in forecast accuracy. We further show that analysts with different abilities differ in their coverage decisions. Thus, the initiation of coverage reveals (some) information about analysts' competency. Lastly, we consider forecasting bias and show that analysts are less likely to bias their forecast if they cover a firm exclusively.