Does Correlated Analyst Coverage Explain Excess Comovement?

Many studies have documented stock return comovement above and beyond that predicted by standard asset pricing models. For example, when stocks are added to an index, their betas with respect to that index tend to increase. I find that much of this excess comovement can be explained by correlated information. If individual analysts ’ earnings forecast errors are correlated across stocks, stock return correlations should be higher than fundamental correlations. I develop a measure of correlated analyst coverage to test this hypothesis and find: (1) Stocks with similar analysts tend to exhibit more excess comovement, controlling for industry, (2) This effect is strongest among “star analysts”, (3) On average, when a stock enters the S&P 500 index, the same analysts that cover other S&P 500 stocks begin to cover the new stock, (4) Changes in excess comovement are larger for stocks with larger increases in correlated analyst coverage around this event, and (5) Changes in the measure around analyst turnover following brokerage firm mergers are correlated with changes in excess comovement. These effects are robust after controlling for industry, for correlations in mutual fund and institutional holdings, and for correlations in unexpected earnings and earnings revisions. Similar but weaker results exist using analysts from the same firm or analysts who previously worked for the same firm