Do Analysts Influence Corporate Financing and Investment?

45 Pages Posted: 14 Jan 2007

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

Date Written: November 28, 2006

Abstract

In this paper, we examine whether abnormal analyst coverage influences the external financing of the firm. Controlling for self-selection bias in analysts' excessive coverage, we find that firms with high (low) excess analyst coverage consistently engage in higher (lower) external financing than their industry peers of similar size. Our evidence also demonstrates that firms with excessive analyst coverage overinvest and realize lower future returns than firms with low analyst coverage. We obtain similar results when we replicate the analysis using analyst coverage initiations. Our empirical findings are not sensitive to various firm characteristics. Our findings are consistent with the hypothesis that analysts, motivated by trading commissions, investment-banking incentives and their pay structure, favor the coverage of firms with the potential to engage in profitable investment banking business (i.e., external financing).

Keywords: analysts, coverage, external financing, investment

JEL Classification: G32

Suggested Citation

Doukas, John A. and Kim, Chansog (Francis) and Pantzalis, Christos, Do Analysts Influence Corporate Financing and Investment? (November 28, 2006). Available at SSRN: https://ssrn.com/abstract=956888 or http://dx.doi.org/10.2139/ssrn.956888

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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