The Dark Side of Analyst Coverage: The Case of Innovation
University of Georgia - Department of Finance
Indiana University - Kelley School of Business - Department of Finance
February 5, 2013
Journal of Financial Economics (JFE), Forthcoming
We examine the effects of financial analysts on the real economy in the case of innovation. Our baseline results show that firms covered by a larger number of analysts generate fewer patents and patents with lower impact. To establish causality, we use a difference-in-differences approach that relies on the variation generated by multiple exogenous shocks to analyst coverage, as well as an instrumental variable approach. Our identification strategies suggest a negative causal effect of analyst coverage on firm innovation. The evidence is consistent with the hypothesis that analysts exert too much pressure on managers to meet short-term goals, impeding firms’ investment in long-term innovative projects. We further discuss possible underlying mechanisms through which analysts impede innovation and show that there is a residual effect of analysts on innovation even after controlling for these mechanisms. Our paper offers novel evidence on a previously under-explored adverse consequence of analyst coverage — its hindrance to firm innovation.
Number of Pages in PDF File: 53
Keywords: analyst coverage, innovation, patents, citations, managerial myopia
JEL Classification: G24, O31, G34
Date posted: November 14, 2011 ; Last revised: July 2, 2014
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