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The Dark Side of Analyst Coverage: The Case of Innovation

53 Pages Posted: 14 Nov 2011 Last revised: 2 Jul 2014

Jie He

University of Georgia - Department of Finance

Xuan Tian

Tsinghua University - PBC School of Finance

Date Written: February 5, 2013

Abstract

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.

Keywords: analyst coverage, innovation, patents, citations, managerial myopia

JEL Classification: G24, O31, G34

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: https://ssrn.com/abstract=1959125 or http://dx.doi.org/10.2139/ssrn.1959125

Jie He (Contact Author)

University of Georgia - Department of Finance ( email )

B318 Amos Hall
Terry College of Business, University of Georgia
Athens, GA 30602-6253
United States

Xuan Tian

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengfu Road
Haidian District
Beijing 100083
China
+86-10-62794103 (Phone)

HOME PAGE: http://xuantian.info/

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