While the numbers no doubt largely reflect the reality that many firms are simply not covered by analysts, we worry that they may also be somewhat contaminated by measurement error. It is possible that the I/B/E/S data set is missing information on some firms’ analysts. Alternatively, it is possible that I/B/E/S has the data, but has assigned a different cusip number to a firm than CRSP. In this case, we would mistakenly code the CRSP firm as having no analysts. In principle, such measurement error should make our tests err on the side of conservatism—it will be harder to discern significant differences across stocks that we classify as low-coverage vs. high-coverage.lu Because of this concern, and because the number of zeros is so much higher in the first few years, all the tests that we present below use a sample period that runs from 1980-1996.11 However, it should be noted that none of our results are materially altered if we instead begin in 1976.
A second key fact that comes out of Table 1 is that for the smallest firms, there is simply no variation in coverage. In particular. Panel В focuses on those firms that are smaller than the 20th percentile NYSE/AMEX firm. As can be seen, almost all of these firms have zero analysts—for example, 82% are uncovered in 1988, which is roughly the midpoint of the sample period we will be using. Consequently, we simply cannot use this part of the population to test any hypotheses having to do with analyst coverage. Hence all our coverage-related tests begin with a subsample that excludes those firms that are below the 20th percentile NYSE/AMEX breakpoint in any given month.12 Note that there is much more variation in analyst coverage in the next size class, which runs from the 20th to the 40th percentile of NYSE/AMEX-in 1988, only 41.7% of the firms in this class are uncovered, and a substantial fraction have as many as three or four analysts.