Under Pressure: The Causal Effect of Financial Analyst Coverage on Long-Term Capital Investments

40 Pages Posted: 20 Oct 2015

Date Written: August 25, 2015

Abstract

This study examines whether the number of financial analysts covering a firm causes corporate short-termism by affecting the horizons of firms’ capital investments. I hypothesize that greater analyst coverage leads to more pressure on firms to perform in the short term, which biases firms against making longer-term capital investments. To establish causality, I employ a difference-in-differences technique that exploits a series of quasi-natural experiments. Using a matched sample of 2,462 U.S.-based firms, I find that firms that lose a covering analyst extend their attention further into the future and invest more in longer-term capital, compared to similar firms that do not lose an analyst. I also find that this effect is stronger for firms in fast-moving industries, and for firms with stronger corporate governance policies.

Keywords: Short-termism, Capital investment horizons, Analyst coverage, Time horizons, Financial markets

Suggested Citation

DesJardine, Mark, Under Pressure: The Causal Effect of Financial Analyst Coverage on Long-Term Capital Investments (August 25, 2015). Available at SSRN: https://ssrn.com/abstract=2650729 or http://dx.doi.org/10.2139/ssrn.2650729

Mark DesJardine (Contact Author)

HEC Paris ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France

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