Analyst Coverage and Intangible Assets

This study examines the relation between analyst coverage and firms’ intangible assets. We assume that firms with substantial intangible assets, most of which are not recognized in firms’ financial statements, have more information asymmetry between managers and investors and more inherent uncertainty about firm value than do other firms. These factors suggest that in the absence of private information acquisition and processing by information intermediaries, such as analysts, share prices of high intangibles firms would less than completely reflect their fundamental values. The possibility of less informative prices suggests opportunities for profitable private information acquisition activities. For analysts, such activities can yield more profitable investment recommendations and higher trading commissions. Thus, we hypothesize that analyst coverage is higher for firms with more intangible assets.(1) To test our hypothesis, we develop an empirical model of analyst coverage that depends on proxies for important classes of intangible assets, such as research and development and brand names, at the firm and industry levels. We also control for analysts’ incentives to cover firms, other than those associated with intangibles.