Abnormal Analyst Coverage, External Financing, and Firm Investment

40 Pages Posted: 21 May 2004

See all articles by John A. Doukas

John A. Doukas

Old Dominion University - Strome College of Business

Chansog (Francis) Kim

The State University of New York at Stony Brook

Christos Pantzalis

University of South Florida

Abstract

In this paper, we examine whether the external financing and investment rate of the firm are influenced by abnormal analyst coverage. We find that firms with high (low) excess analyst coverage have consistently higher (lower) external financing and investment rate than firms of similar size in the same industry. The results show that he impact of analyst coverage on firms' financing and investment decisions works through a direct mechanism that hypes investors' long-term growth prospects of the firm. Our evidence also demonstrates that firms with excessive analyst coverage realize lower future returns than firms with low analyst coverage. This finding is consistent with the hypothesis that analyst coverage is primarily motivated by the pay structure of analysts and investment-banking incentives that favor the coverage of firms with the potential to engage in profitable investment banking business (i.e., external financing).

JEL Classification: G30, G31, G32

Suggested Citation

Doukas, John A. and Kim, Chansog (Francis) and Pantzalis, Christos, Abnormal Analyst Coverage, External Financing, and Firm Investment. Available at SSRN: https://ssrn.com/abstract=548424 or http://dx.doi.org/10.2139/ssrn.548424

John A. Doukas (Contact Author)

Old Dominion University - Strome College of Business ( email )

2080 Constant Hall
Suite 2080
Norfolk, VA 23529-0222
United States
757-683-5521 (Phone)

HOME PAGE: http://www.efmaefm.org/0DOUKAS/doukas.php

Chansog (Francis) Kim

The State University of New York at Stony Brook ( email )

College of Business
Stony Brook, NY 11794
United States
5163040037 (Phone)
631-632-9412 (Fax)

Christos Pantzalis

University of South Florida ( email )

Tampa, FL 33620-5500
United States
(813) 974-3262 (Phone)

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