Analyst Replacement and Analyst Quality

Abstract

Research Question: I examine why a brokerage firm replaces an analyst who follows a specific firm for a long run period.Research Method: The major population for this study comes from the merged I/B/E/S actual/ detail file over the period January 1, 1996 to December 31, 2009. Regression analysis is used to test hypotheses about the effect of analyst coverage on CEO compensation. Additionally, to address the potential endogeneity of analysts switching their jobs, we implement Heckman’s (1979) two-step regression model, which includes the inverse Mills ratio in the second step as a control.Main Findings: I find that the possibility of analyst replacement increases with the existence of a competing analyst. Analysts with higher quality competitors are more likely to be replaced. Moreover, brokerage firms are more likely to stop following a specific firm that is covered for a long-run period, when the analyst covering this firm switches his served brokerage. For cases with lower quality of alternative analysts, the effect is stronger. Contribution: This study contributes to the literature on financial analysts in two ways. First, it provides new insights into factors that affect the analyst replacement. Second, my results also significantly expand the rather limited literature on the influence of analysts on the brokerage firm’s decision to withdraw.