Investment Sensitivity to Stock Prices and Analyst Coverage

Abstract

This study examines whether more analyst coverage mitigates the informational risk borne by small investors. Using the investment-price sensitivity as a proxy for stock price informativeness, we find evidence that analysts do not specialize in the production of firm-specific information and substitute for other corporate governance mechanisms. Our results suggest that analysts are out-siders who have less access to firm-level information. The main findings are robust to many aspects of our methodology.