Analyst coverage and the cost of equity capital

Abstract

The number of analysts following and analyzing a company is an indicator of the quality of the information disclosed (Botasan, 1997). Especially with a newly developed stock market like in Vietnam, analysts will be the bridge to help investors have more information and better understand the information announced by enterprises, thereby increasing the transparency of business information. Increasing information transparency, in terms of both level and quality, helps to reduce the problem of asymmetric information in the market, enhances investor confidence in the company, and reduce the level of risk for investors. Therefore, improving information transparency has a positive effect on reducing the required rate of return of investors, or the cost of equity for businesses. Through data from 37 listed companies on the Vietnamese stock market for the period 2013-2018, this study shows the greater the number of analysts who follow the company (which present the higher degree of transparency of financial information) will reduce the cost of equity. Research also documents that firm with larger market capitalizations and higher growth rate tends have a higher cost of equity.