Stock Price Synchronicity and Analyst Coverage in Emerging Markets

Abstract

This paper examines the relationship between the stock price synchronicity and analyst activity in emerging markets. Contrary to conventional wisdom that suggests that security analysts specialize in the production of firm-specific information, we find that the security analysts predominantly produce market-wide information. Using the R-square statistics of the market model as a measure of the synchronicity of stock price movements, we find that more analyst coverage leads to an increase in stock price synchronicity. Furthermore, after controlling for the influence of firm size on the lead-lag relation, we find that returns on high analyst-following portfolio lead returns on low analyst-following portfolio more than vice versa. We also find that the aggregate changes in the earnings forecast of high analyst-following portfolio affect the aggregate returns of the portfolio itself as well as the the low analyst-following portfolio while the aggregate changes in the earnings forecasts of low analyst-following portfolio have no predictive ability. Finally, when the forecast dispersion is high, the effect of analyst coverage on stock price synchronicity is reduced.