Analyst Coverage Overlaps and Interfirm Information Spillovers

Abstract

We investigate the role of financial analysts as providers of competitive information to the firms they cover. Using analyst coverage overlaps as a proxy for the information set possessed by analysts and patent citations as a proxy for spillovers of information about technology and industry trends, we find that a firm is more likely to cite another firm's patent if the latter firm is covered by the same financial analyst. Difference-in-difference analyses exploiting exogenous shocks to analyst-coverage overlaps support a causal interpretation. Exploring alternative explanations, we find that the relationship between analyst coverage overlaps and patent citations emerges from analyst coverage-related information flows. The effect is stronger for analysts with a relatively higher industry specialization, more experience, a larger coverage portfolio, and higher levels of activity as well as for firm pairs with a larger geographic or organizational diversity. Firms with more analyst-based connections to peers also show greater corporate innovation. Collectively, our evidence indicates that financial analysts not only reduce information asymmetries between firms and capital markets but also facilitate the production of business intelligence through feedback and interfirm information spillovers.

Keywords: Analysts; Coverage overlap; Feedback effect; Knowledge Flow; Information spillover; Patent citations; Corporate innovation

JEL Classification: G24, G30, O31