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Korean Journal of Financial Studies 2015;44(4):729-769.
Published online September 30, 2015.
Overinvestment and Analyst Coverage
Jaehong Lee, Jungeun Cho, Jaimin Goh
과잉투자가 애널리스트 커버리지에 미치는 영향
이재홍, 조정은, 고재민
Abstract
This study examines whether firms’ overinvestment which triggers poor operating performance impacts analyst coverage. According to Prospect Theory, investors are more sensitive to losses than to profits because they perceive the disutility from having losses more than the utility from having profits. Thus, investors would increase their demand for analysts’ forecast information of firms with overinvestment because it may lead to decrease in firm value. On the other hand, analysts would be reluctant to provide information for firms with overinvestment because those firms are more likely to incur high costs of gathering private information and to trigger information risk. In this case, analysts are more likely to decrease their coverage. Based on these reasoning, we hypothesize that the relative magnitude of demand and supply for analysts services resulting from overinvestment will either increase or decrease analyst coverage for firms with overinvestment. First, we find that overinvestment significantly decreases analyst coverage. This implies that while investors who are more sensitive to losses than to profits increase demand for forecast information of firms with overinvestment, analysts are reluctant to release their forecast information. Second, we find that analyst coverage is significantly increased when overinvestment actually decreases future firm performance. The results suggest that when firms’ future operating performance is expected to decrease due to overinvestment, investors increase their demand for analysts forecast information. However, the magnitude of supply side of analysts to avoid releasing forecast information is greater. This study provides comprehensive evidence regarding the effect of overinvestment on analyst coverage by examining the supply side of analysts as well as demand side of investors. Further, this paper performed more in-depth study by analyzing how overinvestment affects analyst coverage when losses are more likely to be realized.
Key Words: 경영성과,과잉투자,손실회피,애널리스트 커버리지,전망이론,Analyst Coverage,Loss Aversion,Operating Performance,Overinvestment,Prospect Theory
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