The dark side of analyst coverage: The case of innovation
He, Jie (Jack) and
Journal of Financial Economics, 2013, vol. 109, issue 3, 856-878
We examine the effects of financial analysts on the real economy in the case of innovation. Our baseline results show that firms covered by a larger number of analysts generate fewer patents and patents with lower impact. To establish causality, we use a difference-in-differences approach that relies on the variation generated by multiple exogenous shocks to analyst coverage, as well as an instrumental variable approach. Our identification strategies suggest a negative causal effect of analyst coverage on firm innovation. The evidence is consistent with the hypothesis that analysts exert too much pressure on managers to meet short-term goals, impeding firms' investment in long-term innovative projects. We further discuss possible underlying mechanisms through which analysts impede innovation and show that there is a residual effect of analysts on innovation even after controlling for these mechanisms. Our paper offers novel evidence on a previously under-explored adverse consequence of analyst coverage—its hindrance to firm innovation.
Keywords: Innovation; Analyst coverage; Patents; Citations; Managerial myopia (search for similar items in EconPapers)
JEL-codes: G24 G34 O31 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:109:y:2013:i:3:p:856-878
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