Do Firm Size Influence Financial Analyst Research Reports and Subsequent Stock Performance

Huai-Chun Lo


This study investigates whether analysts issue more favorable research reports for small stocks than for large stocks. Small stocks tend not to attract investors due to their size, bad liquidity, easily manipulated price, insufficient information, and high-uncertainty risk. If analysts follow a small stock, it might be because the firm is thought to have good prospects. This study finds that analysts report more positively on small stocks, including in their stock recommendations and earnings growth forecasts. The empirical results show that small stocks perform better in the following year than do other stocks but that this is not the case for operating performance. This finding suggests that analysts are more likely to recommend under-valued stocks, but this may not imply that the operating performance of these stocks will improve the following year.

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