Abstract
This paper explores the effect of analyst coverage on financing constraints by selecting listed companies in the Shanghai Stock Exchange and Shenzhen Stock Exchange as a sample for the study. This research finds that analyst coverage mitigates financing constraints after controlling all other variables that affect both investors’ investment decisions and investee’s financing decisions. This result still holds after the robustness check using pooled OLS model with a fixed-effect model and balanced panel data. Additionally, the heterogeneity analysis implies that analyst coverage is negatively related only to financing constraints that large-size firms encounter, whereas analyst coverage does not ease financing constraints that small-size firms encounter. Overall, the results of the study provide regulators with insights into how to improve the information transparency in the capital market, to help investors make optimal investment decisions, and to facilitate companies’ external financing.
Highlights
It is believed that information asymmetry between investors and investees results in financing constraints [1]
This paper investigates the impact of analyst coverage on financing constraints by collecting data from listed companies in the Shanghai Stock Exchange and Shenzhen Stock Exchange during a sample period from 2009 to 2019
This research finds that analyst coverage is negatively related to financing constraints after controlling all other variables that affect both investors’ investment decisions and investee’s financing decisions
Summary
It is believed that information asymmetry between investors and investees results in financing constraints [1]. Analyst coverage can mitigate information asymmetry between investors and firms and provide more information about firms’ performance. Information asymmetry between investors and firms is widespread in the Chinese financial market This means that entities suffer from serious financing constraints caused by asymmetric information. This paper extends the existing literature by providing new evidence analyst coverage affects business decisions, especially in emerging markets such as China. The negative relationship between analyst coverage and financing constraints implies that analysts act as an information provider in the capital market and alleviate the information asymmetry between investors and their targeted firms, easing financing constraints that firms encounter. This paper provides new influential factors that affect financing constraints caused by information asymmetry This indicates that analyst coverage and transparent information assist firms in avoiding heavy financing constraints when raising capital externally.
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