Analyst Following and R&D Investment: Evidence from Reg FD

• In Event: Financial Accounting and Reporting

Abstract

Exploiting an exogenous decrease in analyst information production generated by Reg FD, we show that firms with analyst following (test firms) experience a significant decrease in R&D investment relative to firms without analyst following (control firms) after Reg FD. The decrease in R&D investment concentrates in test firms followed by influential analysts, who are likely to obtain private information from managers prior to Reg FD. The results are also more pronounced for firms that are sensitive to near-term stock performance, as those firms likely suffer from severe agency conflicts of R&D. Our inferences remain robust to various tests addressing bias arising from possible systematic differences between test and control firms. Our results show an important role analysts play in transmitting information and enhancing R&D investment.

Authors

• Jiao Li, Texas Tech University

• Tao Ma, Texas Tech University