Analyst Interest as an Early Indicator of Firm Fundamental Changes and Stock Returns

We posit that a change in analyst interest in a firm is an early indicator of the firm's future fundamentals, capital market activities, and stock returns. We measure increases in analyst interest by observing analysts who do not cover a firm but participate in that firm's earnings conference call, and we measure decreases in analyst interest by observing analysts who cover a firm yet are absent from that firm's call. We find that increases in analyst interest are positively associated with future changes in firm fundamentals and capital market activities, while decreases in analyst interest are negatively associated with capital market activities. We also find that increases (decreases) in analyst interest are positively (negatively) correlated with future stock returns over the next three months and that a hedge portfolio yields a significant abnormal return. Overall, our study shows that analyst interest is a novel and early indicator of future firm fundamentals and capital market consequences