Do Analysts Improve Investment Efficiency?

60 Pages Posted: 16 Oct 2017 Last revised: 26 Jun 2019

See all articles by Jonathan Brogaard

Jonathan Brogaard

University of Utah - David Eccles School of Business

Wei Shi

Deakin University

K.C. John Wei

Hong Kong Polytechnic University

Haifeng You

Hong Kong University of Science & Technology (HKUST) - Department of Accounting

Date Written: June 2019

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 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

Brogaard, Jonathan and Shi, Wei and Wei, Kuo-Chiang (John) and You, Haifeng, Do Analysts Improve Investment Efficiency? (June 2019). Available at SSRN: https://ssrn.com/abstract=3053491 or http://dx.doi.org/10.2139/ssrn.3053491

Jonathan Brogaard

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

HOME PAGE: http://www.jonathanbrogaard.com

Wei Shi (Contact Author)

Deakin University ( email )

Burwood 3125, VIC
Melbourne, 3125
Australia
0404383819 (Phone)

Kuo-Chiang (John) Wei

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

Haifeng You

Hong Kong University of Science & Technology (HKUST) - Department of Accounting ( email )

Clear Water Bay
Kowloon
Hong Kong

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