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

François Derrien

HEC Paris - Finance Department

Ambrus Kecskes

York University - Schulich School of Business

May 23, 2012

Journal of Finance, Forthcoming

We 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 2.4% and 2.6% of total assets, respectively. These results are significantly stronger for firms that are smaller, have less analyst coverage, have a bigger increase in information asymmetry, and are more financially constrained.

Number of Pages in PDF File: 50

Keywords: Financial shocks, Information asymmetry, Real effects, Investment, Financing, Cash holdings, Natural experiment, Matching estimators, Difference-in-differences, Equity research analysts

JEL Classification: D80, G24, G31, G32, G34, G35

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Date posted: December 16, 2010 ; Last revised: March 9, 2013

Suggested Citation

Derrien, François and Kecskes, Ambrus, The Real Effects of Financial Shocks: Evidence from Exogenous Changes in Analyst Coverage (May 23, 2012). Journal of Finance, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1725539 or http://dx.doi.org/10.2139/ssrn.1725539

Contact Information

François Derrien
HEC Paris (Groupe HEC) - Finance Department ( email )
1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
33 1 39 67 72 98 (Phone)
HOME PAGE: http://www.hec.fr/derrien

Ambrus Kecskes (Contact Author)
York University - Schulich School of Business ( email )
4700 Keele Street
Toronto, Ontario M3J 1P3
Feedback to SSRN

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