Firms’ innovation strategy under the shadow of analyst coverage

Authors: Bing Guo, David Pérez-Castrillo and Anna Toldrà-Simats

Journal of Financial Economics, Vol. 131, No 2, 456-483, February, 2019

We study the effect of analyst coverage on firms’ innovation strategy and outcome. Using data of US firms from 1990 to 2012, we find evidence that an increase in financial analysts leads firms to cut research and development expenses, acquire more innovative firms, and invest in corporate venture capital. We attribute the first result to the effect of analyst pressure and the others to the informational role of analysts. We also find that financial analysts encourage firms to make more efficient investments related to innovation, which increases their future patents and citations and influences the novelty of their innovations.

This paper originally appeared as Barcelona GSE Working Paper 980