Analyst Interest, Market Visibility, and Stock Returns

• In Event: Accounting Information and Future Stock Returns

Abstract

Economic theory suggests that market visibility–the extent to which market participants are informed about a firm—affects the cost of capital and firm value. Recent empirical evidence supports the theory and even suggests visibility explains stock returns more than firm fundamentals. In this study, we use analyst interest–the number of analysts who participate on a firm’s earnings conference call–as an early indicator of a firm’s overall market visibility. We show that changes in analyst interest from the prior quarter predict future changes in analyst coverage, future changes in institutional ownership, and future trading volume. We also show that changes in analyst interest are positively correlated with future stock returns. Cross sectional analyses indicate that the marginal effect of analyst interest is strongest for low visibility firms. As our measure predicts commonly-used market visibility proxies and future stock returns, it offers a one-step-ahead advantage in analyzing stock market dynamics.

Authors

• Frank Zhang, Yale University

• Michael J Jung, New York University

• M.H. Franco Wong, INSEAD