Analyst coverage and acquisition returns: Evidence from natural experiments

Takeover target firms covered by more equity analysts are sold for higher premiums while their acquirers earn lower merger announcement returns. We confirm these results using exogenous shocks to coverage arising from brokerage-house mergers or closures (i.e., quasi-natural experiments) as instruments for the loss of analyst coverage. In general, our findings indicate that target coverage by equity analysts materially affects the wealth of all shareholders during acquisitions. Our empirical evidence supports Jensen and Meckling’s (1976) theory that security analysts perform an external monitoring role that mitigates managerial agency problems thereby enhancing the wealth of shareholders. JEL classification: G24; G34