Companies Worse at Innovating the more Financial Analysts Cover Them

by Rachel Baker on September 23, 2013

Jack He and Xuan Tian have recently published a paper that shows companies take the time or risk in innovation as much when they are being followed by financial analysts.

In a recent paper published by the Journal of Financial Economics, He and Tian demonstrated that companies produce fewer, and less-significant patents the more financial analysts cover them. Their conclusion is that analysts—and their investor clients—have little tolerance for short-term failures, and company managers are sensitive to that. The result is that management is less likely to pursue the riskier long-term investments in areas such as research and development that lay the groundwork for innovation.

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