The Forecasting Effects Of Abnormal Analyst Coverage

Analyst plays an important role of information researcher and information intermediary in the financial market,who are also the main professional team focusing on the information research.Analyst behavior has essential impact on the capital markets which has been strengthened in recent years.To explore the unexpected information of target companies contented in their forecast behavior,we developed an abnormal analyst coverage model according to the specific situation of Chinese security market to calculate the unobservable abnormal part of analyst coverage and tested its forecast ability.First of all,we construct the FSCORE index(Piotroski,2000)to measure the corporate performance and find out that group with high abnormal analyst coverage gets significantly higher FSCORE scores and higher liquidity,better operating ability in the subsequent financial reports,suggesting that analysts' coverage decisions predict the changes in firms' performance not yet reflected in market prices and,in doing so,convey information about firms' expected returns.Finally,we explored the relationship between analysts' abnormal attention and firm's expected return from five perspectives,finding that abnormal coverage proxy positively predicts firms' monthly returns after controlling for firms' exposure to standard asset pricing factors and other various disturbance factors.We also find that analysts respond to the downward price pressure triggered by fund outflows by increasing abnormal coverage,suggesting that part of the return predictability is driven by analysts gravitating toward underpriced firms.Conceptually,this study advances understanding of analysts' role as informational intermediaries by showing that analysts allocate coverage based on firms' expected returns.Practically,this study provides a simple characteristic-based model to uncover expected return information embedded in analyst coverage proxies that offers strong predictive power for firms' earnings and returns.