Firms with high analyst coverage engage in excessive external financing and capital spending

September 4, 2008

A new study in the journal Financial Management explored whether abnormal analyst coverage influences the extent to which companies raise funds from external sources (e.g., issue bonds or sell stock) and the amount of new investments firms decide to undertake.

John A. Doukas, Chansog Francis Kim, and Christos Pantzalis reviewed data on firms between 1980 and 2003 and used industry-adjusted metrics to measure excess analyst coverage.

Researchers found that abnormal analyst coverage plays an important role in explaining the firm's external financing and capital spending. Results show that firms with high analyst coverage consistently engage in higher external financing than do their industry peers of similar size. Additionally, firms with high analyst coverage tend to have higher levels of investment than do firms with low analyst coverage.

They also find that firms with high analyst coverage, external financing, and capital spending realize lower future returns than do firms with low analyst coverage, external financing, and capital spending. They argue that this evidence suggests that the impact of analysts on a firm's external financing and investment stems from excessive analyst coverage, which is a result of analysts' self-interest and pressure to promote investment-banking transactions.

The authors conclude that their analysis shows that excessive coverage "tends to enhance the credibility of the information generated by analysts, which affects the investment decisions of existing and new investors."

Source: Wiley

Explore further: Research shows that financial analysts can stifle innovation

Related Stories

Research shows that financial analysts can stifle innovation

July 2, 2013

( —Any number of things can affect a company's ability to innovate: talent, commitment, luck and funding all play big roles. But new research from the University of Georgia shows that one factor outside a company ...

Recommended for you

Experts uncover hidden layers of Jesus' tomb site

October 27, 2016

In the innermost chamber of the site said to be the tomb of Jesus, a restoration team has peeled away a marble layer for the first time in centuries in an effort to reach what it believes is the original rock surface where ...

Important ancient papyrus seized from looters in Israel

October 27, 2016

(—Eitan Klein, a representative of the Israel Antiquities Authority, has announced that an important papyrus document dated to 2,700 years ago has been seized from a group of Palestinian looters who reportedly ...

Ancient parrot fossil found in Siberia

October 26, 2016

(—A Russian paleontologist has discovered a parrot fossil uncovered in Siberia several years ago—the first evidence of parrots living in Asia. In his paper published in Biology Letters, Nikita Zelenkov describes ...


Please sign in to add a comment. Registration is free, and takes less than a minute. Read more

Click here to reset your password.
Sign in to get notified via email when new comments are made.