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Do Financial Analysts Influence Employee Treatment? Evidence from a Natural Experiment
(University of Oregon, 2022-02-18) Abdulsalam, Khaled; Peterson, Kyle
I examine the influence of financial analysts on firms’ treatment of employees. I apply a unique setting by implementing a difference-in-differences design around brokerage mergers as an exogenous shock to analyst coverage. Consistent with a hypothesis that analysts exert negative pressure on employee treatment, my findings show that the exogenous drop in analyst coverage results in a significant improvement in employee treatment. To provide further insight on the results, I run cross-sectional tests and find that the improvement in employee treatment is weaker among firms with more short-term oriented investors and stronger among firms that place greater value on human capital. I also find that the improvement in employee treatment is weaker when firms are more financially constrained and stronger when firms are under more analyst pressure due to previously missing analysts’ consensus earnings forecasts. Finally, I find that the improvement in employee treatment, due to the exogenous drop in analyst coverage, appears to lead to greater innovation. My paper speaks to how analysts can influence stakeholder management by offering evidence on the adverse consequence of analyst coverage on employee treatment.