Analyst Coverage and the Quality of Corporate Investment Decisions

In this paper we examine the effect of financial analysts on the quality of corporate investment decisions. We show that greater analyst coverage leads to higher total factor productivity within firms, a finding that is robust after using both an instrumental variable approach and an experimental design that exploits exogenous reductions in analyst coverage due to broker mergers and closures. We further identify that the positive effect of analysts on firm-level productivity emanates from their critical role in information distribution and external monitoring within more opaque and financially constrained firms and also firms with weaker investor protection