Financial analyst coverage and corporate social performance: Evidence from natural experiments

Abstract

Abstract Research summaryThis study examines the impact of financial analysts on a firm's corporate social performance (CSP). We integrate research on time horizons with stakeholder theory and argue that, in response to short‐term pressure from financial analysts, firms and their managers become more short‐term focused and limit investment in socially responsible activities. Using broker mergers and closures in the United States as exogenous shocks to analyst coverage and a difference‐in‐differences research design, we find that an exogenous decrease in analyst coverage leads to better CSP, establishing a causal relationship between analyst coverage and the level of a firm's CSP. The impact of financial analysts on a firm's CSP is exacerbated if the terminated analyst works for a larger brokerage house and has more general‐ and firm‐specific experiences. Managerial summaryThis study looks at the relationship between financial analysts, a key stakeholder group of the capital market, and a firm's socially responsible activities. Using a sample of U.S. publicly listed firms during the period of 2001–2013, our study finds novel evidence that the pressure to meet earnings target set by financial analysts hinders a firm's socially responsible performance. In addition, this pressure is more salient for firms with analysts that work for large brokerage houses and have more experiences. This study provides new insights to corporate social responsibility research by evaluating the impact of financial analysts on firms' social engagement.