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| Analysts' Negative Coverage and Corporate Investment Efficiency: Carrot and Stick |
| CHEN Shaoling, ZHOU Kaiguo, YANG Haisheng, ZHONG Jiaying
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| School of Economics, Jinan University; School of Finance, Capital University of Economics and Business; Lingnan College, Sun Yat-sen University |
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Abstract As important information intermediaries, analysts play an indispensable role in ensuring the quality of information disclosure in the capital market by thoroughly mining valuable information and providing it to investors, thus enhancing market transparency and investment efficiency. However, the literature has not yet reached a consensus on whether analyst coverage has a positive impact on companies. Analysts' optimism bias is considered the main reason why their coverage does not always exert a positive effect. This bias not only interferes with analysts' due diligence but also triggers widespread questioning of the professional ethics and competence of securities researchers, posing a potential threat to the quality of information and operational efficiency of the capital market. In response to this issue, scholars have conducted extensive studies of analysts' capabilities and intentions. However, optimism bias remains prevalent even among analysts with high levels of skill or weak private motives. Therefore, effectively stripping away the interference of optimism bias is an important prerequisite for accurately assessing the value of analysts as information intermediaries. Considering that domestic analysts exhibit a significantly higher optimism bias than their foreign counterparts, exploratory studies are particularly important, and the focus on analysts' negative coverage provides a suitable research perspective.
Based on the aforementioned ideas, this paper focuses on corporate investment efficiency and comprehensively examines the compound impact and mechanism of action of analysts' negative coverage based on a sample of 485,366 sell-side analyst reports on A-share listed companies in China from 2009 to 2020. The main findings are as follows. First, analysts' negative coverage can simultaneously suppress overinvestment and alleviate underinvestment, significantly enhancing corporate investment efficiency. Second, the positive impact of analysts' negative coverage on corporate investment efficiency is more pronounced when companies face greater market or internal pressures, and negative recommendations have a stronger inhibitory effect on inefficient investments when they are issued by more capable and diligent analysts. Third, after correcting for potential estimation biases in the analysis of mediating effects using doubly debiased lasso (DDL) regression, it is found that the impact of analysts' negative coverage on investment efficiency encompasses both the “stick effect” of exerting short-selling pressure and the “carrot effect” of providing enhanced information. Finally, multi-mediation causal path analysis (MCPA) shows that the carrot effect is stronger than the stick effect, and the direct efficacy of institutional investors is stronger than the indirect efficacy of the capital market.
Our paper makes the following three contributions. First, by extracting negative recommendations from analyst coverage, the paper provides a scientific perspective free from the interference of optimism bias, refining the accurate interpretation of analysts' information intermediary function. In recent years, the frequent occurrence of listed company violations involving analysts in China's capital market has raised widespread concern and deep anxiety in both academic and business circles about analysts' failure to fulfill their “gatekeeper” duties. Against this backdrop, this study will help analysts return to their professional function as objective information intermediaries. Second, given the reality of severe optimism bias in Chinese analyst reports, this paper employs methods such as subsample regression, propensity score matching, CEM, and quantile regression to correct for the sparsity and asymmetry of the negative coverage sample from multiple angles. The results provide robust evidence for the conclusions of this study and offer a versatile scientific reference for solving the problem of scarce samples in empirical research. Third, leveraging the latest research findings on mediation analysis methodologies such as DDL regression and MCPA, this paper provides empirical evidence of how analyst attention affects corporate investment efficiency and offers feasible and reliable solutions for correcting biased estimates caused by omitted variables, testing the interconnectivity among multiple mechanisms, and assessing their relative importance. This enriches the cutting-edge technical methods for testing mechanisms. At a crucial time for the stimulation of corporate vitality and steady advancement of the reform of the registration system, this research will help to clarify policy directions and enhance governance efficiency.
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Received: 11 October 2022
Published: 17 July 2024
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