Analyst Coverage Of Small Cap Firms In A Period Of Brokerage Firm Retrenchment

Abstract

We examine analysts’ incentives to cover small cap firms in the year 2002, a period following stock market declines and brokerage firm retrenchment.  Brokerage companies were losing a substantial number of sell-side analysts during this period and small firms were having unusual difficulty in attracting analyst coverage.  Consistent with analysts’ normal economic incentives and earlier research, we find that firm size, trading volume, and beta are all positively related to the number of analysts that cover a firm, whereas firm complexity is negatively related to analyst coverage.  In contrast to some earlier research, we find no evidence that analysts were more likely to follow glamour (or growth) stocks.  Specifically, price-to-book and revenue growth are not related to analyst coverage, and recent stock performance (price momentum) is negatively related to analyst coverage.  Our interpretation of this evidence is that analysts had reduced incentives to cover glamour stocks following the severe stock market declines in the early 2000s, the increased regulatory scrutiny of securities firms, and the resulting brokerage firm retrenchment.