Analyst Coverage and the Quality of Corporate Investment Decisions

51 Pages Posted: 16 Jul 2018  

Thomas To

University of Sydney Business School

Marco A. Navone

Finance Discipline Group - UTS Business School; Bocconi University - CAREFIN - Centre for Applied Research in Finance; Financial Research Network (FIRN)

Eliza Wu

The University of Sydney - Business School; Financial Research Network (FIRN)

Date Written: June 5, 2018

Abstract

In this paper we examine the effect of financial analysts on the quality of corporate investment decisions. We show that greater analyst coverage leads to higher total factor productivity within firms, a finding that is robust after using both an instrumental variable approach and an experimental design that exploits exogenous reductions in analyst coverage due to broker mergers and closures. We further identify that the positive effect of analysts on firm-level productivity emanates from their critical role in information distribution and external monitoring within more opaque and financially constrained firms and also firms with weaker investor protection.

Keywords: Equity Analysts, Productivity, Information Asymmetry, Corporate Governance, Corporate Investment

JEL Classification: G31, G32, G34, G39

Suggested Citation

To, Thomas and Navone, Marco A. and Wu, Eliza, Analyst Coverage and the Quality of Corporate Investment Decisions (June 5, 2018). Journal of Corporate Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3191067

Thomas To

University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia

Marco A. Navone

Finance Discipline Group - UTS Business School ( email )

Haymarket
Sydney, NSW 2007
Australia

Bocconi University - CAREFIN - Centre for Applied Research in Finance

Via Sarfatti, 25
Milan, 20136
Italy

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Eliza Wu (Contact Author)

The University of Sydney - Business School ( email )

University of Sydney
Darlington
Sydney, NSW 2006
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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