Cross-Sectional Determinants of Analyst Coverage for R&D Firms

Abstract

Prior research document a positive association between analyst coverage and R&D. However, they do not investigate what particular attribute of R&D leads to this positive association. In this study we aim to fill the gap in the extant literature and explore the cross-sectional determinants of the association between R&D and analyst coverage. We investigate four cross-sectional determinants: reporting biases arising from expensing of R&D compared to capitalization of R&D, uncertainty associated with R&D, investors’ attention, and scale effects of R&D. We find that while reporting biases and uncertainty decrease analyst coverage for R&D firms, investors’ attention and scale effects of R&D increase analyst coverage. Furthermore, we find that the positive association between R&D and analyst coverage documented by Barth et al. is fully explained by scale effects of R&D.

Keywords

• analyst coverage
• reporting biases
• expensing vs. capitalization of R&D
• uncertainty
• scale effects of R&D
• investors’ attention