Impact of analyst’s coverage on firms: A review of theory

Abstract

The amount of information available in the financial markets is vast and cannot be interpreted by every investor. Financial analysts collect, analyse and publish reports and recommendations on listed companies.

The impact of financial analysts' coverage of listed companies has been extensively discussed in several markets. The literature has focused on the informational value of financial analysts' reports for both investors and the companies they cover.

Various studies (Barber et al., 2001; Bellando et al., 2016; Kecskés et al., 2016; Moshirian et al., 2009; D. B. Vukovic et al., 20-21; Womack, 1996) have found that financial analysts' publications are valuable in the eyes of investors and help to guide investment decisions.

For the listed company, coverage and monitoring by financial analysts could have a number of positive effects that could help improve its liquidity and even its survival on the stock market.

According to the literature, financial analysts' reports reduce information asymmetries both between the monitored company and investors and between different categories of investors. They reduce agency costs between majority and minority shareholders. Their publication would also improve the informational efficiency of the market.

In this article, we attempt to provide a narrative literature review of the main studies that have highlighted the impact of financial analysts' coverage and monitoring of firms. We focus on the value of coverage to the firm rather than to investors.

Keywords: Analyst coverage, informative content, recommendations, efficient market hypothesis, information asymmetry.

JEL Classification : G14

Paper type: Theoretical Research