Analysts and Corporate Liquidity Policy

This paper examines how equity analysts affect corporate liquidity policy and the value of cash. Greater analyst coverage reduces information asymmetry between a firm and outside shareholders and enhances the monitoring process, in turn increasing the value of cash and allowing firms to hold more cash. The cash-to-assets ratio increases by 5.2 percentage points when moving from the bottom analyst-coverage decile to the top decile. The marginal value of $1 of corporate cash holdings is $0.95 for the bottom analyst-coverage decile and $1.82 for the top decile. The positive effects are robust to a battery of endogeneity checks. We also perform tests employing a unique dataset consisting of public and private firms, which suggest that observed differences in cash policy may largely be attributable to analyst coverage in public firms. These findings constitute new evidence on the real effects of analyst coverage and the channels through which they occur.