Research

The Effect of Analyst Coverage on Firm-Specific Volatility: Less Information or Less Noise?

We look at whether the negative relation between firm-specific volatility and analyst coverage occurs

because analysts reduce firm-specific information or whether they reduce noise. We hypothesize that

analyst research helps investors discern between information signals and noisy signals. As a result,

fewer noisy signals are misinterpreted for information, resulting in less noise in price fluctuations. We

study the effects of analyst coverage on firm-specific volatility in US analyst coverage initiations

between 1984 and 2002. We find a significant reduction in noise after analyst initiations that cannot be

explained by firm growth, increase in trading volume, or increase in institutional ownership.

Additionally, the magnitude of the increase in coverage has a direct effect on the magnitude of the noise

reduction after initiations.

Publication Information
Article Title: The Effect of Analyst Coverage on Firm-Specific Volatility: Less Information or Less Noise?
Journal: Financial Analyst Journal (Sep, 2007)
Author(s): Schutte, Maria Gabriela;  Unlu, Emre
Researcher Information
    
Unlu, Emre
Unlu, Emre
Executive Director of Executive Education
Expertise:
  • Corporate Finance
Finance
CoB 201 H
P.O. Box 880490
University of Nebraska-Lincoln
Lincoln, NE 68588-0490, USA
Phone: (402) 472-2353
emre@unl.edu