Diversity In Analyst Coverage

Abstract

This paper examines the effect of intra-industry "earnings informativeness" and proprietary firm information on variation in security analyst coverage within industries. Earnings informativeness is defined as the extent to which privately developed or obtained information about one firms' earnings provides useful information about the earnings of its industry co-members. Proprietary information provides signals concerning future firm profitability, relative to industry competitors, resulting from such factors as new product developments and innovations in production processes. The results reveal that levels of analyst coverage relative to mean levels of industry-specific analyst interest is significantly positively associated with intra-industry earnings informativeness and size-adjusted annual research and development expenditures (a proxy for proprietary firm information). The findings also show that certain determinants of analyst coverage (e.g., firm size and institutional ownership) identified in the prior literature as explaining variation in aggregate analyst following also hold at the industry level. Finally, the paper examines whether the model variables found to possess explanatory power within industries can also serve to explain observed variation in inter-industry levels of analyst interest and the results suggest that they can.