Do Analysts Influence Corporate Financing and Investment?


  • The authors gratefully acknowledge the comments of an anonymous referee and the IBES International Inc. for providing earnings per share forecast data, available through the Institutional Brokers Estimate System. An earlier version of this paper was circulated with the title “Abnormal Analyst Coverage, External Financing, and Firm Investment.”


We examine whether abnormal analyst coverage influences the external financing and investment decisions of the firm. Controlling for self-selection bias in analysts' excessive coverage, we find that firms with high (low) analyst coverage consistently engage in higher (lower) external financing than do their industry peers of similar size. Our evidence also demonstrates that firms with excessive analyst coverage overinvest and realize lower future returns than do firms with low analyst coverage. Our findings are consistent with the hypothesis that analysts favor the coverage of firms that have the potential to engage in profitable investment-banking business.