Busy Analysts and Firm Monitoring

Abstract

Consistent with the view that “busy” analysts face time and effort constraints in monitoring firms, we find that higher busyness lowers firm valuation. The underlying mechanisms include lower operating performance, higher cost of capital, greater earnings management, excessive CEO compensation, and lower institutional ownership. These effects are less pronounced for larger firms and when analysts have greater experience covering the firm/industry. Our inferences are supported by a novel experimental design based on shocks to analyst busyness from broker mergers. These results suggest that analyst monitoring relies not only on the level of analyst coverage, but also on its quality.

Keywords: Sell-side analysts, Analyst busyness, Information environment, Firm monitoring

JEL Classification: G30, G32, G34, K22, L22, L25