What is the value of sell-side analysts? Evidence from coverage initiations and terminations

- Investor recognition (IR) increases significantly after analyst coverage initiations.
- IR decreases significantly after exogenous coverage terminations due to brokerage mergers or closures.
- Changes in IR exhibit significant explanatory power over the market reaction to initiations/exogenous terminations.
- Changes in IR and the market reaction are greater when analysts devote more time/effort to promoting the stocks.
- Changes in IR and the market reaction are greater when the analysts' past initiations trigger larger increases in IR.

We investigate three potential channels of analyst value creation: improving fundamental performance through monitoring, reducing information asymmetry, and increasing investor recognition. We show that changes in investor recognition have consistent explanatory power for the market reaction to coverage initiations and terminations but find mixed evidence for changes in information asymmetry and no evidence for changes in fundamental performance as determinants of the market reaction. These results suggest that analysts create value for firms under their coverage by improving their investor recognition and not by monitoring or reducing information asymmetry.