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Business strategy, stock price informativeness, and analyst coverage efficiency
Author(s) -
Zhang Rongrong
Publication year - 2021
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1002/rfe.1101
Subject(s) - synchronicity , stock (firearms) , market efficiency , stock price , business , competition (biology) , robustness (evolution) , economics , financial economics , microeconomics , econometrics , mechanical engineering , paleontology , series (stratigraphy) , engineering , biology , ecology , philosophy , biochemistry , chemistry , epistemology , gene
We examine how business strategy affects stock price informativeness which in turn influences analyst coverage efficiency. Using stock price synchronicity and the probability of informed trading as proxies for stock price informativeness, we show that stock prices of prospectors are less informative than those of defenders. Next, we explore two channels through which business strategy influences analyst coverage efficiency. We first test and find support for an information transfer channel, i.e., the higher stock price synchronicity of prospectors facilitates more information transfer by analysts, resulting in higher analyst coverage efficiency of prospectors than defenders. Next, we test and find support for an informed trading channel, i.e., the higher probability of informed trading on stocks of defenders intensifies competition between informed traders and analysts. Such competition adversely affects analyst coverage efficiency, leading to lower analyst coverage efficiency of defenders than prospectors. Our findings are robust to an array of robustness checks including 2SLS/IV tests, differences‐in‐difference tests, and high‐tech industry sensitivity analyses.