Under Pressure: The Causal Effect of Financial Analyst Coverage on Long-Term Capital Investments

Abstract

This study examines whether the number of financial analysts covering a firm causes corporate short-termism by affecting the horizons of firms’ capital investments. I hypothesize that greater analyst coverage leads to more pressure on firms to perform in the short term, which biases firms against making longer-term capital investments. To establish causality, I employ a difference-in-differences technique that exploits a series of quasi-natural experiments. Using a matched sample of 2,462 U.S.-based firms, I find that firms that lose a covering analyst extend their attention further into the future and invest more in longer-term capital, compared to similar firms that do not lose an analyst. I also find that this effect is stronger for firms in fast-moving industries, and for firms with stronger corporate governance policies.