Analyst Coverage Networks and Corporate Financial Policies

Abstract

Sell-side analysts play an important role in propagating corporate capital structure choices across firms. Using exogenous characteristics of analyst network peers as well as the “friends-of-friends” approach from the network effects literature to identify peer effects, we find that exogenous changes to financial policies of firms covered by an analyst lead other firms covered by the same analyst to implement similar policy choices. This mechanism has significant effects on leverage and equity issuance decisions. Our evidence indicates that these analyst network peer effects are distinct from industry peer effects, propagate from leader to follower firms and are more pronounced among peers connected by analysts that are more experienced and from more influential brokerage houses.

Keywords: Peer effects, Analyst Coverage Network, Corporate Financial Policies

JEL Classification: G24, G32, G34