Do Security Analysts Reduce Noise?

This study investigates the role of security analysts in reducing noise in stock price fluctuations. Using a sample of analyst coverage initiations between 1984 and 2006, the study finds that (1) noise is significantly reduced in the year following the initiation and (2) the extent of the noise reduction is a function of the intensity of analyst coverage during the initiation year. The results suggest that analyst coverage makes stock prices less noisy. Analysts' noise-reducing ability can have positive consequences for the performance of corporate and portfolio managers who rely on forecasting to make long-term financial decisions.