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The Dark Side of Analyst Coverage: The Case of Innovation

Jie He

University of Georgia - Department of Finance

Xuan Tian

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

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Date posted: November 14, 2011 ; Last revised: July 2, 2014

Suggested Citation

He, Jie and Tian, Xuan, The Dark Side of Analyst Coverage: The Case of Innovation (February 5, 2013). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: http://ssrn.com/abstract=1959125 or http://dx.doi.org/10.2139/ssrn.1959125

Contact Information

Jie He (Contact Author)
University of Georgia - Department of Finance ( email )
424 Brooks Hall
Terry College of Business, University of Georgia
Athens, GA 30602-6253
United States
Xuan Tian
Indiana University - Kelley School of Business - Department of Finance ( email )
1309 E. Tenth Street
Bloomington, IN 47405
United States
812-8553420 (Phone)
824-8555875 (Fax)
HOME PAGE: http://kelley.iu.edu/tianx

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