Joint Meeting of the Mid-Atlantic and Northeast Regions

The Great Sell-Side Sell-Off: Evidence of Declining Financial Analyst Coverage

• In Event: Financial Analysts and Forecasts

Abstract

Purpose – We examine whether financial analyst coverage declined over the past decade, and if any loss of analyst coverage is associated with changes in forecast accuracy, both globally and with respect to the European Union (EU). While the sell-side industry worldwide is affected by a trend towards passive investment vehicles, firms operating in the EU also face the greatest direct impact of new regulation: the EU’s second Markets in Financial Instruments Directive (MiFID II).
Design/methodology/approach – After observing a general decline in analyst following, we calculate the firm-specific loss of analyst coverage relative to the maximum between 2011-2014. We next examine whether this loss of coverage is greater for firms in the EU and whether a loss of coverage is associated with consensus analyst accuracy, controlling for global changes in the sell-side analyst industry.
Findings – Results indicate that over the past decade, firm-specific analyst coverage globally declined 14.2%, while the decline in the EU was an even-greater 19.6%. Loss of coverage in the EU is most pronounced for small- and mid-cap firms. We also find forecast accuracy decreases in a loss of coverage, especially for small- and mid-cap firms globally, as well as small-cap firms in the EU and those located in EU emerging markets.
Originality/value – This study is the first to document a concerning global decline in analyst coverage since 2011. Our results provide broad-based empirical support for anecdotal reports that smaller firms in the EU and those in EU emerging markets bear the brunt of consequences stemming from MiFID II’s impact on brokerage firms.

Authors

• Justyna Skomra, Pennsylvania State University (Behrend College)

• Barry R Hettler, Ohio University

• Arno Forst, University of Texas Rio Grande Valley