The informational role of analyst coverage on firm innovation: evidence from China

We examine the effect of financial analysts' informational and monitoring roles on firm innovation in the developing Chinese market. The findings demonstrate that analyst coverage has a positive influence on the number of corporate patent and invention applications. Causality is established by using an instrumental variable, and is reinforced by implementing a regression-discontinuity design (RDD) based on index reconstitutions and a difference-in-difference (DiD) analysis using the Shanghai-Hong Kong Stock Connect program as a plausible exogenous shock. Further, the positive effects are more pronounced for firms with severer financial constraints, higher information asymmetry, lower tolerance for failure among investors, and lower institutional ownership. These findings indicate that the informational role of financial analysts is more salient than their monitoring role in the context of developing markets.