The Real Effects of Financial Shocks: Evidence from Exogenous Changes in Analyst Coverage

Abstract

International audienceWe study the causal effects of analyst coverage on corporate investment and financing policies. We hypothesize that a decrease in analyst coverage increases information asymmetry and thus increases the cost of capital; as a result, firms decrease their investment and financing. We use broker closures and broker mergers to identify changes in analyst coverage that are exogenous to corporate policies. Using a difference-in-differences approach, we find that firms that lose an analyst decrease their investment and financing by 1.9% and 2.0% of total assets, respectively, compared to similar firms that do not lose an analyst

Firms’ innovation strategy under the shadow of analyst coverage

“…11 A related paper by Derrien and Kecskés (2013) shows that a decrease in analyst coverage increases the cost of capital, which results in a decrease in firm investments such as acquisition expenses. 12 We relate to these papers in that we contrast the information and the pressure effects of financial analysts in the context of firms' innovation strategy and outcomes.…”

“…19 For those firms that acquire during our sample period (i.e., 3, 990 firm-years), the average accumulated number of patents of the target firms is 4.81 and the corresponding number of citations is 16.82. 20 Also, 0.3% of the firms set up CVC funds in a given year, and around 1.4% invest in startup companies during the sample period.…”

Do Analysts' Preferences Affect Corporate Policies?

“…Still others study how short sales constraints affect a range of corporate policies (Grullon, Michenaud, and Weston (2011)). Our paper is perhaps closest to Derrien and Kecskés (2012), but whereas they study how analyst coverage affects corporate policies, we study how analyst preferences affect corporate policies.…”

Debt Renegotiation and Debt Overhang: Evidence from Lender Mergers

“…Restricting control firms to those who also borrow from the merging lenders ensures that unobservable characteristics of the merging lenders do not drive the results. To make treated and control firms more comparable, I then follow a similar procedure as in Hong and Kacperczyk (2010) and Derrien and Kecskés (2013) to refine the set of control firms. Specifically, I require control firms to be in the same two-digit SIC industries and to be in the same terciles sorted based on total assets, Tobin's Q, and cash flow as their treated counterparts.…”