Playing to the Gallery: Corporate Policies and Equity Research Analysts

It is well known that equity analysts choose to cover firms about which they have favorable views. We exploit this fact and use analysts’ coverage decisions to infer their preferences for corporate policies. Next, we show that firms cater to analysts’ preferences. Firms exogenously losing analyst coverage subsequently change their corporate policies away from the preferences of the analyst that drops coverage. Our findings suggest that analysts affect corporate policies. The effects are economically significant and are bigger for small firms and firms with low analyst coverage. Our evidence is consistent with firms altering their corporate policies to cater to the preferences – whether based on beliefs or skills – of equity research analysts.