Do Analysts Improve Investment Efficiency?

Abstract

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 mainly driven by the role analysts play in information acquisition and in price efficiency. The 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