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The dark side of analyst coverage: The case of innovation

  • He, Jie (Jack)
  • Tian, Xuan
Registered author(s):

    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.

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    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 109 (2013)
    Issue (Month): 3 ()
    Pages: 856-878

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    Handle: RePEc:eee:jfinec:v:109:y:2013:i:3:p:856-878
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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