Hostname: page-component-77c89778f8-vpsfw Total loading time: 0 Render date: 2024-07-21T11:04:30.093Z Has data issue: false hasContentIssue false
  • English
  • Français

Does Common Analyst Coverage Explain Excess Comovement?

Published online by Cambridge University Press:  01 November 2016

Ryan D. Israelsen
Get access Rights & Permissions [Opens in a new window]

Abstract

This article shows that correlated errors in news about fundamentals are an important, rational determinant of excess comovement. Individual analysts’ forecast errors tend to be correlated across stocks. Using a proxy for correlated forecast errors based on analyst coverage, I find that stocks with similar sets of analysts exhibit more excess comovement, controlling for industry and other variables. Exogenous changes in commonality in analyst coverage around i) brokerage firm mergers and ii) additions to an index lead to changes in excess comovement. This information channel explains 10% to 25% of the increase in comovement around additions to the S&P 500 index.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 51 , Issue 4 , August 2016 , pp. 1193 - 1229
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2016 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Adams, R., and Ferreira, D.. “A Theory of Friendly Boards.” Journal of Finance, 62 (2007), 217–250.Google Scholar
Anton, M., and Polk, C.. “Connected Stocks.” Journal of Finance, 69 (2014), 1099–1127.Google Scholar
Barberis, N., and Shleifer, A.. “Style Investing.” Journal of Financial Economics, 68 (2003), 161–199.Google Scholar
Barberis, N.; Shleifer, A.; and Wurgler, J.. “Comovement.” Journal of Financial Economics, 75 (2005), 283–317.Google Scholar
Boni, L., and Womack, K.. “Analysts, Industries, and Price Momentum.” Journal of Financial and Quantitative Analysis, 41 (2006), 85–109.Google Scholar
Boyer, B.“Style Related Comovement: Fundamentals or Labels?” Journal of Finance, 66 (2011), 307–332.Google Scholar
Boyer, B., and Zheng, L.. “Investor Flows and Stock Market Returns.” Journal of Empirical Finance, 16 (2009), 87–100.Google Scholar
Brennan, M.; Jegadeesh, N.; and Swaminathan, B.. “Investment Analysis and the Adjustment of Stock Prices to Common Information.” Review of Financial Studies, 6 (1993), 799–824.Google Scholar
Carhart, M.“On Persistence in Mutual Fund Performance.” Journal of Finance, 52 (1997), 57–82.Google Scholar
Chen, H.; Chen, S.; and Li, F.. “Firm-Level Return Comovement.” Working Paper, University of British Columbia (2008).Google Scholar
Chordia, T., and Swaminathan, B.. “Trading Volume and Cross-Autocorrelations in Stock Returns.” Journal of Finance, 55 (2000), 913–935.Google Scholar
Cohen, L.; Frazzini, A.; and Malloy, C.. “Sell-Side School Ties.” Journal of Finance, 65 (2010), 1409–1437.Google Scholar
Coval, J., and Stafford, E.. “Asset Fire Sales (and Purchases) in Equity Markets.” Journal of Financial Economics, 86 (2007), 479–512.Google Scholar
Fama, E., and French, K.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.Google Scholar
Fracassi, C.“Corporate Finance Policies and Social Networks.” Management Science, forthcoming (2016).Google Scholar
Green, C., and Hwang, B.. “Price-Based Return Comovement.” Journal of Financial Economics, 93 (2009), 37–50.Google Scholar
He, J., and Tian, X.. “The Dark Side of Analyst Coverage: The Case of Innovation.” Journal of Financial Economics, 109 (2013), 856–878.Google Scholar
Hedge, S., and McDermott, J.. “The Liquidity Effects of Revisions to the S&P Index: An Empirical Analysis.” Journal of Financial Markets, 6 (2003), 413–459.Google Scholar
Heflin, F.; Subramanyam, K.; and Zhang, Y.. “Regulation FD and the Financial Information Environment: Early Evidence.” Accounting Review, 78 (2003), 1–37.Google Scholar
Hong, H., and Kacperczyk, M.. “Competition and Bias.” Quarterly Journal of Economics, 25 (2010), 1683–1725.Google Scholar
Ingersoll, J. Theory of Financial Decision Making, Vol. 3, Lanham, MD: Rowman & Littlefield (1987).Google Scholar
Jaccard, P.“Étude Comparative de la Distribution Florale dans une Portion des Alpes et des Jura.” Bulletin del la Société Vaudoise des Sciences Naturelles, 37 (1901), 547–579.Google Scholar
Kallberg, J., and Pasquariello, P.. “Time-Series and Cross-Sectional Excess Comovement in Stock Indexes.” Journal of Empirical Finance, 15 (2008), 481–502.Google Scholar
Karolyi, A., and Stulz, R.. “Why Do Markets Move Together? An Investigation of U.S. Japan Stock Return Co-Movements.” Journal of Finance, 51 (1996), 951–986.Google Scholar
Kumar, A., and Lee, C.. “Retail Investor Sentiment and Return Comovements.” Journal of Finance, 61 (2006), 2451–2486.Google Scholar
Lo, A., and MacKinlay, C.. “When Are Contrarian Profits Due to Stock Market Overreaction?” Review of Financial Studies, 3 (1990), 175–205.Google Scholar
Pastor, L., and Stambaugh, R.. “Liquidity Risk and Expected Stock Returns.” Journal of Political Economy, 111 (2003), 642–685.Google Scholar
Pirinsky, A., and Wang, Q.. “Institutional Investors and the Comovement of Equity Prices.” Working Paper, Texas A&M University (2004).Google Scholar
Sørensen, T.“A Method of Establishing Groups of Equal Amplitude in Plant Sociology Based on Similarity of Species and Its Application to Analyses of the Vegetation on Danish Commons.” Biologiske Skrifter/Kongelige Danske Videnskabernes Selskab, 5 (1948), 1–34.Google Scholar
Subrahmanyam, A.“Social Networks and Corporate Governance.” European Financial Management, 14 (2008), 633–662.Google Scholar
Thompson, S.“Simple Formulas for Standard Errors that Cluster by Both Firm and Time.” Journal of Financial Economics, 99 (2011), 1–10.Google Scholar
Wu, J., and Zang, A.. “What Determine Financial Analysts’ Career Outcomes during Mergers?” Journal of Accounting and Economics, 47 (2009), 59–86.Google Scholar