The Real Effects of Financial Shocks: Evidence from Exogenous Changes in Analyst Coverage
50 Pages Posted: 16 Dec 2010 Last revised: 9 Mar 2013
Date Written: May 23, 2012
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.
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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