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Analysts' Selective Coverage and Subsequent Performance of Newly Public Firms
Author(s) -
DAS SOMNATH,
GUO REJIN,
ZHANG HUAI
Publication year - 2006
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2006.00869.x
Subject(s) - residual , business , media coverage , public information , accounting , econometrics , actuarial science , economics , computer science , public relations , political science , algorithm , sociology , media studies
This study examines the ability of analysts to forecast future firm performance, based on the selective coverage of newly public firms. We hypothesize that the decision to provide coverage contains information about an analyst's underlying expectation of a firm's future prospects. We extract this expectation by obtaining residual analyst coverage from a model of initial analyst following. We document that in the three subsequent years, initial public offerings with high residual coverage have significantly better returns and operating performance than those with low residual coverage. This evidence indicates analysts have superior predictive abilities and selectively provide coverage for firms about which their true expectations are favorable.