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Discussion Question 5 in Chapter 9 Why don’t analysts follow smaller firms, or firms that are...

Discussion Question 5 in Chapter 9

Why don’t analysts follow smaller firms, or firms that are making losses? What practical difficulties do these firms present, and what investors might be interested in their valuations?

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Answer #1

Analysts and broking houses are sell side agents. These people make money when there is a large amount of trading activity happening as they earn commission on the trading activity. If the firm is small or not making profits and is losing money, the analysts will not be interested in making a recommendation about this company.

The practical difficulties of these small firms is that their trading activity is small. The sell side investors may be interested in valuation of small companies and due to the availability of any unique information they can make a profit due to the information advantage.

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