Financial analyst coverage and corporate social performance: Evidence from natural experiments

• Author: Louise Y. Lu,Yangxin Yu,Cuili Qian
• Date: 01 December 2019
• Published date: 01 December 2019
• DOI: http://doi.org/10.1002/smj.3066

RESEARCH ARTICLE

Financial analyst coverage and corporate social

performance: Evidence from natural experiments

Cuili Qian

1

| Louise Y. Lu

2

| Yangxin Yu

3

1

Naveen Jindal School of Business,

University of Texas at Dallas, Richardson,

Texas

2

Research School of Accounting, Australian

National University, Canberra, Australia

3

Department of Accountancy, City

University of Hong Kong, Kowloon Tong,

Hong Kong

Correspondence

Cuili Qian, JSOM RM4.416, Naveen Jindal

School of Management, 800 W. Campbell

Road, Richardson, TX 75080.

Email: cuili.qian@utdallas.edu

Abstract

Research summary:This study examines the impact of

financial analysts on a firm's corporate social performance

(CSP). We integrate research on time horizons with stake-

holder theory and argue that, in response to short-term

pressure from financial analysts, firms and their managers

become more short-term focused and limit investment in

socially responsible activities. Using broker mergers and

closures in the United States as exogenous shocks to ana-

lyst coverage and a difference-in-differences research

design, we find that an exogenous decrease in analyst cov-

erage leads to better CSP, establishing a causal relation-

ship between analyst coverage and the level of a firm's

CSP. The impact of financial analysts on a firm's CSP is

exacerbated if the terminated analyst works for a larger

brokerage house and has more general- and firm-specific

experiences.

Managerial summary:This study looks at the relationship

between financial analysts, a key stakeholder group of the

capital market, and a firm's socially responsible activities.

Using a sample of U.S. publicly listed firms during the

period of 2001–2013, our study finds novel evidence that

the pressure to meet earnings target set by financial ana-

lysts hinders a firm's socially responsible performance. In

addition, this pressure is more salient for firms with ana-

lysts that work for large brokerage houses and have more

experiences. This study provides new insights to corporate

social responsibility research by evaluating the impact of

financial analysts on firms' social engagement.

Received: 16 December 2016 Revised: 30 May 2019 Accepted: 11 June 2019 Published on: 2 August 2019

DOI: 10.1002/smj.3066

Strat Mgmt J. 2019;40:2271–2286. wileyonlinelibrary.com/journal/smj © 2019 John Wiley & Sons, Ltd. 2271

KEYWORDS

corporate social performance, financial analysts, natural experiments,

stakeholders, time horizons

1|INTRODUCTION

Corporate social performance (CSP) is a multidimensional concept covering a firm's response to a

wide range of stakeholder demands and expectations (Carroll, 1979; Wood, 1991). Given the impor-

tance of CSP for firms and for society, scholars have examined a number of individual, organiza-

tional, and institutional determinants of CSP, including CEO hubris and political ideology (Chin,

Hambrick, & Treviño, 2013; Tang, Qian, Chen, & Shen, 2015), institutional ownership (Neubaum &

Zahra, 2006), customer monitoring (Christmann & Taylor, 2006), community, and media pressure

(Marquis, Glynn, & Davis, 2007). Yet no published research has addressed how pressure from exter-

nal financial analysts influences a firm's CSP investments. This is surprising given that financial ana-

lysts not only shape investors' expectations and investment decisions, but also significantly affect a

firm's strategic decisions (Benner & Ranganathan, 2012).

Financial analysts are an important stakeholder group who specialize in making evaluations and

recommendations about the firms they follow (Hong, Kubik, & Solomon, 2000). While there is some

evidence of analysts' increasing favor and use of CSP-related information in recent years (Ioannou &

Serafeim, 2015; Luo, Wang, Raithel, & Zheng, 2015), the literature suggests that managers still feel

pressured by analysts and are willing to sacrifice long-term economic value to meet short-term targets

(e.g., He & Tian, 2013). Thus, it is unclear a priori how a firm's CSP might be affected by financial

analysts. Different from prior studies that focus on how analysts evaluate a firm's CSP information,

this study integrates stakeholder theory (Freeman, Wicks, & Parmar, 2004) with the research on time

horizons (Laverty, 1996; Marginson & McAulay, 2008) to examine how firms alter their socially

responsible investments in response to the change of analyst coverage.

Research on time horizons suggests that managers do not always have the luxury of waiting for

long-term investments to payoff (Marginson & McAulay, 2008). Instead, they often feel pressured

by the earnings expectation set by financial analysts, leading to managerial myopia—improper

assessment of the long-term consequences of their decisions (Graham, Harvey, & Rajgopal, 2005;

Marginson & McAulay, 2008). Survey evidence suggests managers feel that there is an increasing

trend of pressure to meet short-term earnings target. In a recent joint Wall Street Journal editorial,

Warren Buffet, chairman and CEO of Berkshire Hathaway Inc., and Jamie Dimon, CEO of

JPMorgan Chase & Co., urge all public companies to end quarterly earnings forecasts, as such focus

on short-term profits costs a firm's long-term development such as sustainability (Bloomberg News,

2018). Not meeting earnings expectations is often considered as managerial failure and can lead to

severe punishment from the markets. With an incentive to meet or beat the earnings expectation set

by analysts, managers may limit investments with a long payoff period (Souder & Shaver, 2010).

Sustainable relationship between stakeholders and a firm requires persistent efforts and cannot be

built overnight (Wang & Choi, 2013), which makes it susceptible to short-term pressure created by

financial analysts. Such pressure should increase with more intensive analyst coverage. We would

thus expect that a decrease in analyst coverage should reduce the short-term pressure and leave man-

agers more latitude to wait for the deferred returns from longer-horizon investments, leading to

better CSP.

2272 QIAN ET AL.