Abstract
This paper investigates the influence of analyst forecasts on firm innovation from behavioral and institutional perspectives. We argue that optimistic analyst revenue forecasts raise firm expectation on feasibility and effectiveness of implementing an innovation strategy, thus prompt firms to invest more in innovation. We also posit that subnational differences in institutional environment in terms of factor market development, intellectual property rights protections, and government corruption all affect firm perception on return on innovation, and consequently moderate firm decision to invest in innovation. These hypotheses are tested using a longitudinal sample of Chinese listed firms between 2003 and 2017. We document that optimistic analyst revenue forecasts increase firm R&D investment intensity. This relationship is stronger when forecast dispersion is small, when firms are in regions with more advanced factor markets, stronger intellectual property protection, and less corrupted government.
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