Do Analysts' Preferences Affect Corporate Policies?

Abstract

Equity research analysts tend to cover firms about which they have favorable views. We exploit this tendency to infer analysts' preferences for corporate policies from their coverage decisions. We then use exogenous analyst disappearances to examine the effect of these preferences on corporate policies. After an analyst disappears, firms change their policies in the direction opposite to the analyst's preferences. The influence of analyst preferences on policies is stronger for firms for which analyst coverage is likely to matter more: young firms, and firms with higher market valuations. Our results suggest that firms choose their corporate policies, in part, to be consistent with the preferences of their analysts.

Keywords: Equity research analysts, Preferences, Real effects, Investment, Financing, Payouts, Leverage, Cash holdings

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