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.