Investor Attention and the Cross-Section of Analyst Coverage

Investor attention drives analyst coverage. We find that, between 2012-2017, institutional investor attention explains 21.39% of the cross-sectional variation in analyst coverage, second only to market capitalization (22.09%). We build a model where limited investor attention drives information supply. Analysts compete for scarce investor attention to maximize volume for brokerage houses. In equilibrium, analysts cluster in riskier stocks, for which information is most valuable. However, relaxing investors' attention constraints can reinforce coordination motives for analysts and lead to even higher clustering. The results mirror "crowded" coverage in the U.S., where the most-covered 5% equities amount to 25% of earnings forecasts.