Do Managers Learn from Analysts?

Abstract

To maximize firm value managers must efficiently invest new capital. This paper examines whether managers learn from analysts in making capital investment decisions. Using broker mergers and closures as exogenous shocks to the number of analysts covering a firm, we find that firm investment-Q sensitivity significantly decreases after losing an analyst. The impact is largest for firms with the fewest number of analysts. Moreover, the effect is mainly driven by the role analysts play in information acquisition and in price efficiency. We also find the spillover effect of analyst coverage using Reg FD as an alternative shock to analyst information production. The results suggest that the recent decline in analyst coverage may negatively impact firm investment and market-wide resource allocation.

Keywords: Analyst coverage; Broker mergers and closures; Managerial learning; Investment-Q sensitivity; Reg FD

JEL Classification: D83, G15, G31, K22