The Implications of Abnormal Analyst Coverage

This study decomposes firm-level total financial analyst coverage into two components: i) expected coverage representing analysts’ mechanical coverage decision, and ii) abnormal coverage capturing analysts’ expectations about firms’ prospects. Research findings show that abnormal analyst coverage predicts firm subsequent fundamentals and future financial reporting quality. The study also shows that auditors exert more engagement efforts to the incremental audit risk associated with excessive coverage. Auditors, however, show no response the audit risk from neglected firms. Overall, this thesis suggests that abnormal analyst coverage is a leading indicator of future financial reporting and audit risk, and this information should be relevant to auditors.