Analyst Coverage Overlaps and Interfirm Information Spillovers

Abstract

We investigate the role of financial analysts in facilitating the flow of relevant competitive information between firms. Using patent citations as a proxy for interfirm information spillovers, we find that firms are more likely to cite another firm's patent if that firm is covered by the same financial analyst. Difference-in-difference analyses exploiting exogenous shocks to analyst coverage overlaps over time suggest that the documented effect is not simply due to changes in firms' business models and corresponding changes in analyst coverage; consistent with a causal relationship between analyst coverage overlaps and interfirm information spillovers. The effect is stronger for analysts with a relatively higher industry-specialization, more experience, a larger coverage portfolio, and a higher forecast activity, as well as for firm pairs with a larger geographic or organizational diversity. Overall, our findings suggest that capital market relationships not only play an important role in reducing information asymmetries between firms and capital markets but also facilitate the production of business intelligence through feedback and interfirm information transfers.

Keywords: Analyst Coverage, Capital Market Relationships, Feedback Effect, Knowledge Flow, Information Spillover, Patent Citations

JEL Classification: G24, G30, O31