Determinants of Analysts’ Dropped Coverage Decision: The Role of Analyst Incentives, Experience, and Accounting Fundamentals

Abstract: After controlling for economic performance (i.e., stock returns), we find that several proxies for analyst incentives as well as accounting‐based fundamentals are related to an analyst's decision to drop coverage of a firm. When we separately consider the drop decisions of analysts with High vs. Low Experience, we find that Low Experience analysts place more weight on firm risk and decreases in liquidity when making their drop decision, while High Experience analysts place higher weights on accounting losses and decreasing SG&A margins. Lastly, when High (Low) Experience analysts initiate dropped coverage, their Low (High) Experience peers mimic the dropped coverage fairly quickly (fairly slowly).