Many investors have immense faith in analysts’ research as they fear that lack of information might trigger inefficiencies. Here, analysts play a vital intermediary role with their extensive access to relevant data.
Coverage initiation of a stock by analyst(s) usually portrays higher investor inclination. Investors, on their part, often assume there is something special in a stock to attract analysts’ attention. In other words, they believe that the company coming under the microscope definitely has some value.
Obviously, stocks are not randomly chosen to cover. New coverage on a stock usually reflects a reassuring future envisioned by the analyst(s). At times, increased investors’ focus on a stock motivates analysts to take a closer look at it. After all, who doesn’t love to produce something that is already in demand? Hence, we often find that analysts’ ratings on newly added stocks are more favorable than their ratings on continuously covered stocks.
It is needless to say, the average change in broker recommendation is preferred over a single recommendation change.