Determinants of Analysts’ Dropped Coverage Decision: The Role of Analyst Incentives, Experience, and Accounting Fundamentals

Authors

  • John Shon,

    1. The authors are both from Fordham University, New York, They appreciate the comments of Donal Byard, Joshua Livnat, Stan Markov, Martin Walker (editor), an anonymous referee, and seminar participants at the 2008 AAA Annual Meeting (Anaheim), Baruch College, Fordham University, Loyola Marymount University, Sonoma State University and the University of Southern California. The authors thank Fordham University for research support.
    Search for more papers by this author
  • Susan M. Young

    Corresponding author
    1. The authors are both from Fordham University, New York, They appreciate the comments of Donal Byard, Joshua Livnat, Stan Markov, Martin Walker (editor), an anonymous referee, and seminar participants at the 2008 AAA Annual Meeting (Anaheim), Baruch College, Fordham University, Loyola Marymount University, Sonoma State University and the University of Southern California. The authors thank Fordham University for research support.
    Search for more papers by this author

Susan M. Young, Fordham University, 1790 Broadway, 11–13, New York, NY 10019, USA. e-mail: syoung16@fordham.edu

Abstract

Abstract:  After controlling for economic performance (i.e., stock returns), we find that several proxies for analyst incentives as well as accounting-based fundamentals are related to an analyst's decision to drop coverage of a firm. When we separately consider the drop decisions of analysts with High vs. Low Experience, we find that Low Experience analysts place more weight on firm risk and decreases in liquidity when making their drop decision, while High Experience analysts place higher weights on accounting losses and decreasing SG&A margins. Lastly, when High (Low) Experience analysts initiate dropped coverage, their Low (High) Experience peers mimic the dropped coverage fairly quickly (fairly slowly).

Ancillary