The Value Effects of Analysts Coverage Initiations

We analyze the effects of analyst forecast coverage initiations in the United States in the 1995-2000 time period. It is usually believed that analysts provide valuable information about the firms they cover as well as reduce agency costs by acting as a monitor for the managers. This, in turn, may reduce the information problems between the firms and the investment community. To the extent that these attributes are valuable,investors may take into account the presence of analysts in pricing of securities. By using a unique data set of analysts' coverage initiations, the evidence presented herein supports the prediction that firms experience positive abnormal returns (of about three percent) as well as enhanced liquidity and lower information costs at the time of the initiations. Our results are more pronounced for NASDAQ firms versus NYSE and AMEX firms as consistent with the previously observed differences among firms traded in these markets. Finally, the reputation of the analyst company is positively associated with the initiationreturn, and the initiation return is less if the analyst company is also an underwriter of the IPO