Does Common Analyst Coverage Explain Excess Comovement?

Abstract

This article shows that correlated errors in news about fundamentals are an important, rational determinant of excess comovement. Individual analysts’ forecast errors tend to be correlated across stocks. Using a proxy for correlated forecast errors based on analyst coverage, I find that stocks with similar sets of analysts exhibit more excess comovement, controlling for industry and other variables. Exogenous changes in commonality in analyst coverage around i) brokerage firm mergers and ii) additions to an index lead to changes in excess comovement. This information channel explains 10% to 25% of the increase in comovement around additions to the S&P 500 index.

Shared analyst coverage: Unifying momentum spillover effects

“…First, we focus on return predictability rather than contemporaneous relationships. Second, by using the information in the entire network of analyst connections, we are able to document much stronger relationships between firms and hence stronger return predictability than the specialized predictability results of Israelsen (2016). Third, we…”

“…The t-statistics are below 1.28 for all five high minus low peer return strategies inTable 10ofIsraelsen (2016), and one of the strategies has a negative alpha.Electronic copy available at: https://ssrn.com/abstract=3015582…”

“…Finally, we compare our connected-stock measure with the one studied by Israelsen (2016). We limit our analysis to the largest 10% of stocks so the tests are conducted on the same sample that is studied by Israelsen.…”

“…t-statistics are shown below coefficient estimates. This table compares the predictability of the CS momentum measure with the peer momentum measure of Israelsen (2016). The sample in each month consists of the largest 10% stocks.…”

“…Our paper differs from these in examining the effect of shared analyst coverage on future stock returns, and the relation to previously documented momentum spillover effects. Israelsen (2016) finds that common analyst coverage leads to excess comovement. He also briefly examines whether trading strategies based on past return of peer firms can generate abnormal returns.…”