Determinants of Analyst Following

Abstract

This study explores analyst following of companies in terms of equity analysts' potential trading and underwriting revenues and costs. Using measures of equity securities trading, equity securities issuance, risk, corporate disclosure, insider and institutional ownership, and complexity, we develop a series of empirical models predicting the direction and significance of associations between these hypothesized determinants and analyst following and test these models by applying OLS regression analysis to 1996 data from about 200 operating firms. Our results are generally significant and in the directions predicted in our hypotheses. They suggest that analyst following is positively related to equity trading, equity issuance and corporate disclosure, and negatively related to risk, insider and institutional ownership (organizational structure) and complexity. However, we find that some results are highly sensitive to the specification of other variables in the models. This research extends prior work by modeling analyst following in terms of explicit trading and underwriting revenues and costs, by integrating a number of previously independently-studied determinants of analyst following, by applying an improved measure of firm complexity, and by assessing the sensitivity of estimated coefficients and relationships to the specification of the model.