Financial Markets and Corporate Science: Evidence from Exogenous Changes in Analyst Coverage

Abstract

This paper examines the relationship between financial markets and firms' R&D activities. Specifically, we investigate the role of financial analysts for firms' propensity to engage in corporate science, i.e. the production and dissemination of scientific knowledge. While basic and applied research may enable firms to generate significant private returns, doing research is an inherently risky activity. Therefore, it remains ambiguous how financial market participants perceive and possibly influence firm strategies related to corporate science. Our econometric analysis relies on exogenous decreases in analyst coverage for US publicly listed firms caused by broker house closures and mergers. We provide evidence that reduced analyst coverage increases scientific publication outputs, whereas inventive outcomes decrease or stagnate, and R&D expenditures remain mostly unchanged. At the same time, we find a positive association between corporate science and firm performance indicators. These results are consistent with the view that analysts may encourage firms to engage in myopic behavior at the expense of long-run performance.