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We hypothesize that analyst coverage reduces firms’ cost of capital, thereby inducing more investments in organization capital, one of the most important intangible investments. Our identification relies on the exogenous analyst coverage variation resulting from brokerage house mergers and closures. We find a significant decline in firms’ organization capital after analyst coverage reduction. The post-event decline in organization capital is concentrated in firms with higher costs of capital, financial constraints, and external equity dependence. Firm productivity and operating performance deteriorate correspondingly among firms with a large decline in organization capital in the post-event window. Our findings are in contrast to the existing studies on the adverse effect of analyst coverage in enhancing managerial myopia.
Keywords: Organization Capital; Analyst Coverage; Cost of Capital
JEL classification: G30, G31, E22