Analyst Coverage and the Cost of Raising Equity Capital: Evidence from Underpricing of Seasoned Equity Offerings

By Robert M. Bowen, Xia Chen, Qiang Cheng. 2008

304 citations recorded by the source corpus.

There is limited direct evidence on the impact of analyst coverage on the cost of capital. In this paper, we hypothesize that the amount and nature of analyst coverage can reduce information asymmetry among investors and thus lower the cost of raising equity capital. We investigate the effect of analyst coverage on the underpricing of seasoned equity offerings (SEOs), which is a substantial cost of issuing new shares. Based on 4,766 SEOs in the period 1984-2000, our results suggest that more analyst coverage is associated with lower SEO underpricing. Compared with firms without analyst coverage, firms with the median level of analyst coverage - three analysts - have a 1.19% lower SEO underpricing, a relative decrease of 38%. This effect is robust to controlling for other factors affecting SEO underpricing. We also examine additional attributes of analyst coverage and find that firms followed by analysts working for the lead underwriter, with a reputation for superior ability, or with lower forecast dispersion have incrementally lower SEO underpricing.

Subfields: Accounting, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/b542101513353b7d767e0559851437c4675ffb25

Citations in the corpus

• Information interpretation or information discovery: which role of analysts do investors value more? (2012, unknown): “2000) or lower cost of raising capital (Bowen et al. 2008).”
• Does corporate social responsibility affect the cost of capital (2011, unknown): “…1964, Lintner, 1965); larger firms attract wider media and analyst coverage, which reduces information asymmetry and the cost of equity capital (Bowen et al., 2008); higher book-to-market firms are expected to earn higher ex post returns (Fama and French, 1992); and levered firms earn higher…”
• Determinants and Economic Consequences of Non-financial Disclosure Quality (2016, unknown): “Firms with higher quality CSR disclosures should enjoy a lower cost of capital through greater analyst coverage, higher levels of institutional ownership, and greater stock liquidity (Amihud, 2002; Bowen et al., 2008; Chen et al., 2007; Shleifer & Vishny, 1986).”
• Does increased board independence reduce earnings management? Evidence from recent regulatory reforms (2015, unknown): “The research design follows Bowen et al. (2008); we measure future performance using future cash flow from operations and future return on assets and use similar control variables.”