Do Analysts Improve Investment Efficiency?
60 Pages Posted: 16 Oct 2017 Last revised: 26 Jun 2019
Date Written: June 2019
To maximize firm value managers must efficiently invest new capital. This paper examines whether analyst coverage impacts a firm’s investment efficiency. Using broker mergers and closures as exogenous shocks to the number of analysts covering a firm, we find that firm investment efficiency significantly decreases after losing an analyst. The impact is largest for firms with the fewest number of analysts. We find evidence that the effect is driven by the role analysts play in information acquisition and in price efficiency. Our results suggest that the recent decline in analyst coverage may negatively impact resource allocation and future firm performance.
Keywords: Investment-Q Sensitivity; Managerial Learning; Brokerage Mergers and Closures; Market Efficiency
JEL Classification: D83; G15; G31; K22
Suggested Citation: Suggested Citation