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Analyst coverage and the idiosyncratic skewness effect in the Taiwan stock market

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  • Lin, Mei-Chen

Abstract

In this study, we investigate the effect of analyst coverage on the idiosyncratic skewness (IS) anomaly. We adopt the ordinary least square method with the corresponding standard errors that are heteroskedasticity consistent and clustered by firm. Our results show that the IS anomaly exists in the Taiwanese stock market, and analyst coverage mitigates it. Moreover, we use one exogenous shock on analysts due to the mergers and closures of brokerages to address the endogenous concern, and to confirm that analyst coverage reduces the IS anomaly. Specifically, the buy and upgrade recommendations of analysts mitigate the negative IS spreads, but their sell and downgrade recommendations aggravate those spreads. Further, we use a quasi-natural experiment on short-sale constraints in the Taiwanese stock market and find that the effects of analysts' recommendations on the negative IS spreads are not subsumed by those constraints.

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  • Lin, Mei-Chen, 2023. "Analyst coverage and the idiosyncratic skewness effect in the Taiwan stock market," International Review of Financial Analysis, Elsevier, vol. 85(C).
    • Handle: RePEc:eee:finana:v:85:y:2023:i:c:s1057521922004100
    DOI: 10.1016/j.irfa.2022.102460
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    Keywords

    Idiosyncratic skewness; Analyst coverage; Recommendations; Revisions; Limits-to-arbitrage;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G4 - Financial Economics - - Behavioral Finance

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