Organization capital and analyst coverage

Abstract

We hypothesize that analyst coverage reduces firms’ cost of capital and thereby facilitates more investments in organization capital, one of the most important intangible investments. To test our hypothesis, we use the exogenous variation in analyst coverage due to the mergers and closures of brokerages and measures of organization capital based on SG&A expenditures and text-based information manually collected from firms’ 10-K filings. Our results show that firms’ organization capital investments significantly decline with reduced analyst coverage. The post-event decline in organization capital is concentrated in firms with higher costs of capital, greater financial constraints, and greater dependence on external equity. Our findings are in contrast to other studies that have shown how the adverse effect of analyst coverage enhances managerial myopia and reduces corporate R&D. • Analyst coverage facilitates more investments in organization capital (OC). • We use a quasi-natural experimental of brokerage house mergers and closures. • Organization capital declines after analyst coverage reduction. • Decline in OC is concentrated in firms with higher costs of capital. • Firm productivity and operating performance decrease in firms with decline in OC.