Takeover Restrictions, Informational Externalities, and Analyst Coverage of Peer Firms

This study examines the impact of heightened demand for information after a takeover restriction on analyst coverage of peer firms. In the United States, the government’s Committee on Foreign Investment (CFIUS) has the authority to restrict foreign takeovers based on national security grounds. These takeover restrictions increase operational and financial uncertainty for both the target firm and its industry peers, resulting in a greater investor demand for information. Using a sample of CFIUS denials from 2008 to 2019, we find that a denial of a foreign takeover is followed by an increase in the number of existing and new sell-side analysts covering a target firm’s industry peers, consistent with an increase in the demand for information. We also show that this increased coverage is more pronounced for peer firms with a higher degree of information asymmetry and that the coverage leads to an improvement in the information environment of peer firms. Our results are robust to differential trends in analyst coverage of peer firms, changes in disclosure practices, and alternative industry classifications. Our study provides novel evidence that informational externalities from a firm-specific shock, such as a takeover restriction, can affect analyst coverage decisions for peer firms.