Duality of Analyst Coverage: Evidence from Product Recalls

Abstract

This article investigates the role of financial analysts in product quality failures. Using a comprehensive sample of product recalls, we establish three main results. First, analyst coverage on average increases the frequency of product quality failures, particularly when managers are inclined to succumb to analysts’ pressure to pursue short-term profits. Second, analyst coverage inhibits quality-enhancing activities such as tightening control over input quality, establishing a quality-focused corporate culture, and increasing SG&A investments. Lastly, analysts can help reduce quality failures when they have supply-chain expertise. Taken together, our results uncover both detrimental and beneficial effects of analysts on product quality and safety.

Keywords: analyst coverage, product quality, product recall, corporate failure

JEL Classification: G24, G34, G38, L15