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The Information Content of Announcements of Analyst Coverage

This paper examines the security market response to the announcement of sell-side analysts' decisions to initiate coverage of a firm. We examine the market reaction to the initiation announcement, and the accompanying investment recommendation, by disaggregating our sample based on existing analyst coverage at the announcement date. We find, on average, a significantly larger, positive stock price reaction to buy recommendations conveyed in announcements of coverage initiation for firms already followed by other financial analysts compared to such announcements for firms with no prior analyst following. Tests show that the relation between the extent of preexisting analyst coverage and market response is non-linear and concave down in shape. Specifically, we find that lightly followed firms, on average, experience larger price reactions to announcements of coverage initiations than either previously uncovered firms or more heavily followed firms. We test for and find that this result is not attributable to the presence of an underwriting relationship existing between the analysts' employer and the firm receiving coverage. We do find that initiations by analysts named to Institutional Investor magazine's "All-American Research Team" produce a significantly larger market reaction than do initiations by non All-American security analysts. In addition, similar to the market response associated with other types of information events, we observe that proxies for the richness of the initiated firms' pre-announcement information environment are associated with event day average abnormal returns.