Abstract

The relation between analyst publications and their effects on the underlying stocks is a well-researched field of finance. However, none go so far as to identify the fundamental effect of a firm receiving its first recommendation from an analyst beyond standard recommendation
effects. We examine a sample of 6168 analyst initiation of coverage events, separated into a positive subsample and negative subsample to determine the abnormal returns generated in the two days after, one-month after, and one year after event windows using an event study methodology. In addition, we compare these abnormal returns to those generated by a respective control subsample of mid-caps to calculate the certification effect. Finally, we study the relationship the different event window certification effects have with firm-level variables. We
find that the abnormal returns generated by the small-caps are consistently different than those generated by the respective control subsample of mid-caps, and that the certification effects are
significantly non-zero values. We also find that the short certification effect has no relationship with firm level variables, while mid and long certification effects have a relationship with Board Size. We fail to establish a relationship between the mid and long certification effects and the change of stock volatility of the underlying firm. We conclude that while the certification effect does exist in the short-term, its effect is lost in the long-term as new events take place and confound the results.