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Do Analysts Influence Corporate Financing and Investment?

In this paper, we examine whether abnormal analyst coverage influences the external financing of the firm. Controlling for self-selection bias in analysts' excessive coverage, we find that firms with high (low) excess analyst coverage consistently engage in higher (lower) external financing than their industry peers of similar size. Our evidence also demonstrates that firms with excessive analyst coverage overinvest and realize lower future returns than firms with low analyst coverage. We obtain similar results when we replicate the analysis using analyst coverage initiations. Our empirical findings are not sensitive to various firm characteristics. Our findings are consistent with the hypothesis that analysts, motivated by trading commissions, investment-banking incentives and their pay structure, favor the coverage of firms with the potential to engage in profitable investment banking business (i.e., external financing).