Analyst Coverage Network and Corporate Financial Policies

Abstract

This paper shows that sell-side analysts play an important role in propagating corporate financial policy choices, such as leverage and equity issuance decisions across firms. Using exogenous characteristics of analyst network peers as well as the “friends-of-friends” approach from the network effects literature to identify peer effects, we find that exogenous changes to financial policies of firms covered by an analyst leads other firms covered by the same analyst to implement similar policy choices. We find that a one standard deviation increase in peer firm average leverage is associated with a 0.35 standard deviation increase in a firm's leverage, and a one standard deviation increase in the frequency of peers’ equity issuance leads to a 29.6% increase in the likelihood of issuing equity. We show evidence that these analyst network peer effects are distinct from industry peer effects and are more pronounced among peers connected by analysts that are more experienced and from more influential brokerage houses.