Analyst following and R&D investment

Exploiting an exogenous decrease in analyst access to private information, we show that firms with analyst following (test firms) experience a significant reduction in R&D investment, relative to firms without analyst following (control firms), after Reg FD. We also document that the negative impact on firms’ R&D investment after Reg FD is borne out in firms’ innovation outputs measured by patents. Additional analysis reveals that the decrease in R&D investment concentrates among test firms followed by influential analysts who likely had access to private information before Reg FD and among test firms facing disincentives to invest in R&D due to takeover pressure. Our inferences remain robust to various tests addressing potential bias arising from possible systematic differences between test and control firms. Overall this study demonstrates that private disclosures of R&D information through analysts mitigate managers’ R&D investment disincentives and facilitate innovation but that this channel is impeded by Reg FD.