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Analyst Coverage and Corporate Innovation: Evidence from Exogenous Changes in Analyst Coverage

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  • Kun Tracy Wang
  • Simeng Liu
  • Guqiang Luo

Abstract

Using a stacked difference‐in‐differences design, we examine how exogenous reductions in analyst coverage arising from brokerage mergers and closures affect firm innovation in China. We find that firms affected by brokerage mergers or closures experience a reduction in innovation quantity, quality, investment, and efficiency. A content analysis of analyst reports reveals that exogenous analyst losses lead to reduced analyst coverage of firm innovation, and that a loss of analysts who issue innovation‐related reports drives the negative effect of analyst losses on firm innovation. In addition, we show that analyst losses have a negative effect on firms’ information environments and access to external financing, which we confirm are important determinants of firm innovation. Furthermore, these negative effects are driven by firms with weaker information environments and more severe agency conflicts, which experience a greater deterioration of their information environment and access to external financing following the analyst losses. Finally, we show that analyst losses do indeed lead to negative economic consequences, as evidenced by reduced sales growth, market share growth, and firm value, suggesting that innovation outputs are economically valuable in China. Overall, our evidence suggests that in the context of emerging markets, analysts can play a crucial role in shaping firm innovation by covering firms’ innovation activities and thereby reducing information asymmetry and mitigating agency conflicts with respect to innovation.

Suggested Citation

  • Kun Tracy Wang & Simeng Liu & Guqiang Luo, 2025. "Analyst Coverage and Corporate Innovation: Evidence from Exogenous Changes in Analyst Coverage," Abacus, Accounting Foundation, University of Sydney, vol. 61(3), pages 657-710, September.
  • Handle: RePEc:bla:abacus:v:61:y:2025:i:3:p:657-710
    DOI: 10.1111/abac.12360
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