Analysts' Selective Coverage and Subsequent Performance of Newly Public Firms

Abstract

This study examines the ability of analysts to forecast future firm performance, based on the selective coverage of newly public firms. We hypothesize that the decision to provide coverage contains information about an analyst's underlying expectation of a firm's future prospects. We extract this expectation by obtaining "residual analyst coverage" from a model of initial analyst following. We document that in the three subsequent years, initial public offerings with high residual coverage have significantly better returns and operating performance than those with low residual coverage. This evidence indicates analysts have superior predictive abilities and selectively provide coverage for firms about which their true expectations are favorable. Copyright 2006 by The American Finance Association.

Long-run performance of IPOs and the role of financial analysts: some French evidence

“…Numerous studies have documented a positive relationship between the coverage number and the subsequent short-and long-run performance (Bradley, Jordan, and Ritter 2003;Das, Guo, and Zhang 2006). These findings are reported in Table 5.…”

“…Das, Guo, and Zhang (2006) and Bradley, Jordan, and Ritter (2003) found a positive relationship between the coverage number and subsequent performance. We expected a positive coefficient.…”

“…Bradley, Jordan, and Ritter (2003) and Corwin and Schultz (2005) found that having an underwriting syndicate is related to research coverage. Das, Guo, and Zhang (2006) examined analyst coverage and found that unexpected analyst coverage is positively related to long-run performance. Bradley et al (2008b) did not find incremental coverage to be related to improved long-run performance.…”

How External Corporate Governance Affects Seos Performance: Mediating Effect of Agency Costs

“…Chung and Jo (1996) find that securities analysts can monitor corporate management by revealing business information to the market, thereby reducing agency costs. Das, Guo, and Zhang (2006) suggest that analyst coverage significantly predicts the cross-sectional variation in stock returns. For the SEO sample, ACOV is the natural logarithm of the number of analysts that provide one-year-ahead earnings forecasts during the six-month period leading up to the SEO announcement.…”

Do Underwriters Matter? The Impact of the Near Loss of an Equity Underwriter

“…Researchers have not found affiliated analysts to be the best predictors of stock price performance (Michaely and Womack (1999) and Das, Guo and Zhang (2006)). Fang and Yasuda (2008) find that the severity of conflict of interest has a negative effect on the performance of lower ranked analysts, regardless of bank reputation.…”