Does Information Asymmetry Impede Market Efficiency? Evidence from Analyst Coverage

This paper presents evidence that information asymmetry increases equity misvaluation by showing the impact of analyst coverage on misvaluation. To establish the causality, I use two exogenous events (broker closures and mergers), as well as an instrumental variable approach. The identification strategies indicate that there is a negative causal effect of analyst coverage on equity misvalutaion. The evidence is consistent with the hypothesis that information environment can cause investors to use their perceived value in cash flow and discount rate to estimate their perceived equity prices, which deviate from intrinsic value.