Analysts disproportionally cover companies whose fundamentals correlate with industry peers. These firms, designated as bellwether companies, are shown to have significant stock price effects on companies with little to no analyst coverage within their same industry.
The paper offers two propositions. The first proposition states that companies whose fundamentals are similar to those of other companies in their industry attract more analyst coverage. The second proposition states that earnings estimates of companies with a large analyst following, or “bellwether firms,” influence the returns of companies with similar fundamentals but for which information is sparse because of limited analyst coverage. These ideas are shown to have a significant impact on return and volatility characteristics. Click here to read the entire abstract. Abstract Author - Paul R. Rossi, CFA