Analyst Coverage and Financing Decisions


  • Chang is from the Department of Finance, University of Melbourne. Dasgupta and Hilary are from the Department of Finance and the Department of Accounting, Hong Kong University of Science and Technology, respectively. We thank the Editor, an anonymous referee, Jie Gan, Vidhan Goyal, Clive Lennox, Kai Li, Ron Masulis, Kim Sawyer, Sheridan Titman, Kent Womack, and seminar participants at the Third Dartmouth Contemporary Corporate Finance Issues Conference, Hong Kong University of Science and Technology, the University of Melbourne, and the Chinese University of Hong Kong for helpful comments. Hilary thanks the Wei Lun Foundation for financial support. Dasgupta and Hilary acknowledge financial support from Hong Kong's Research Grants Council under grant numbers HKUST6064/01H (Dasgupta) and DAG03/04.BM02 and DAG03/04.BM45 (Hilary).


We provide evidence that analyst coverage affects security issuance. First, firms covered by fewer analysts are less likely to issue equity as opposed to debt. They issue equity less frequently, but when they do so, it is in larger amounts. Moreover, these firms depend more on favorable market conditions for their equity issuance decisions. Finally, debt ratios of less covered firms are more affected by Baker and Wurgler's (2002)“external finance-weighted” average market-to-book ratio. These results are consistent with market timing behavior associated with information asymmetry, as well as behavior implied by dynamic adverse selection models of equity issuance.