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Why Do Analysts Continue to Provide Favorable Coverage for Seasoned Stocks?

Research has documented that the first report an investment bank affiliated analyst issues on a newly listed stock tends to be favorable. Our analysis of 16,824 relationships between analyst teams and established listed companies during 1995-2003 indicates that analyst coverage decisions of seasoned stocks are influenced by their affiliations with investment banks and mutual funds. Controlling for market returns, stock characteristics, and a variety of performance indicators, we find analysts are more likely to issue favorable reports when the stock is held by affiliated mutual funds. The more invested by affiliated mutual funds, the more optimistic the analyst rating compared to the consensus.

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