By Matt Krantz, USA TODAY

Wall Street layoffs and cutbacks are having an unexpected negative effect on stocks: An increasing number of companies no longer are followed by stock analysts.

Despite revelations that Wall Street research has often been biased and used to drum up investment banking business, analysts' research helps stocks.

Since October 1987, stocks that analysts stopped covering have subsequently underperformed the Standard & Poor's 500 index by nearly 2 percentage points each year, says Zacks Investment Research. Stocks picking up coverage outperformed by nearly 2 percentage points.

That's why experts are concerned to see more companies losing analyst coverage. Many companies rely on analysts' reports to get the attention of large investors such as mutual funds. "When analysts drop coverage, institutional investors lose interest in the stock," says Mitch Zacks, portfolio manager at Zacks.

Only 4,499 companies have active analyst coverage, vs. the peak of 6,072 companies covered in 1999, Zacks says. Presently, 2,966 analysts cover stocks, down 10% from a year ago and part of a three-year slump in the brokerage industry's ranks.

Small and midsize companies are usually the first to be dropped from coverage. That's bad for the stock market, because it's usually smaller firms with innovations that lead in the early stages of a bull market, says Chuck Hill, market strategist at Thomson First Call. Without analyst coverage, it could take longer for investors to find those stocks, Hill says.

Newly dropped:

• InfoUSA. In 1999, Wall Street firms couldn't cover this seller of marketing services enough. Eager to get on good terms with the company so they could win fees bringing its Internet unit public, four major investment banks routinely published reports on it, says Chief Financial Officer Stormy Dean. But after the Internet bubble burst, the coverage evaporated. Now, no major firms cover InfoUSA — and it's a struggle to get in front of investors, Dean says.

"If you don't have analyst coverage, people don't know about you," he says.

• Friedman Billings Ramsey. This regional investment banking firm provides research on other companies, but no analysts cover its stock. That's a complete reversal from February 2000, when three major firms covered FBR.

FBR hired Bob Leahy as senior vice president of communications in June 2002, partly to persuade research firms to cover it again. "If you're a small or midcap, it's challenging to get coverage," he says.

Not everyone thinks the drop-off is all bad. Marc Gerstein, research chief at Multex, says investors can benefit when Wall Street "discovers" a stock and begins to cover it.

"If you find a solid company that happens to not have coverage, that could be a good thing," he says.