Analyst Coverage and Financing Decisions

51 Pages Posted: 3 Aug 2004

See all articles by Xin (Simba) Chang

Xin (Simba) Chang

Nanyang Business School

Sudipto Dasgupta

Chinese University of Hong Kong, Lancaster University, and CEPR

Gilles Hilary

Georgetown University - Department of Accounting and Business Law

Abstract

We provide evidence that analyst coverage affects the pattern of security issuance. First, firms covered by fewer analysts are less likely to issue equity as opposed to debt. They issue equity less frequently, but when they do so, it is in larger amounts. Moreover, these firms depend more on favorable market conditions for their equity issuance decisions. Although all firms issue larger amounts of equity after favorable stock returns, this tendency is more pronounced for less covered firms. Finally, debt ratios of firms followed by fewer analysts are more affected by Baker and Wurgler's (2002) external finance-weighted average market-to-book ratio than those of firms followed by more analysts. These results are consistent with market timing behavior in the presence of information asymmetry, as well as behavior implied by dynamic adverse selection models of equity issuance.

Keywords: Adverse Selection, Capital Structure, Analyst Coverage

JEL Classification: G32 D82

Suggested Citation

Chang, Xin and Dasgupta, Sudipto and Hilary, Gilles, Analyst Coverage and Financing Decisions. Tuck Contemporary Corporate Finance Issues III, Forthcoming. Available at SSRN: https://ssrn.com/abstract=571065 or http://dx.doi.org/10.2139/ssrn.571065

Xin Chang

Nanyang Business School ( email )

S3-B1B-76 Nanyang Avenue
Singapore, 639798
Singapore

HOME PAGE: http://www.ntu.edu.sg/home/changxin

Sudipto Dasgupta (Contact Author)

Chinese University of Hong Kong, Lancaster University, and CEPR ( email )

CUHK, Cheng Yu Tung Building, Room 1224
Shatin, NT
Hong Kong
Hong Kong

Gilles Hilary

Georgetown University - Department of Accounting and Business Law ( email )

McDonough School of Business
Washington, DC 20057
United States

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