Analyst Coverage and Synchronous Knowledge Search: Evidence from a Natural Experiment

Abstract

This study develops a theory concerning the ways in which firms manage knowledge search in relation to the search behaviours of competitors. While the search behaviours of competitors provide information cues regarding the possible distribution of valuable innovation opportunities in the knowledge space, a focal firm may search with competitors synchronously (i.e. searching with competitors in the same knowledge areas at the same time) or asynchronously (i.e. searching in different knowledge areas from competitors). This study examines the quest for legitimacy under institutional pressure as a key contingency that shapes firms’ propensity to search with competitors synchronously or asynchronously. Focusing on scrutiny by security analysts as a source of institutional pressure, and employing mergers and acquisitions of brokerage houses as a natural experiment that results in exogenous drops in analyst coverage, this study finds that firms are more prone to search with competitors asynchronously following an exogenous drop in analyst coverage, providing support to the theory. Additional analysis shows that the positive relationship between an exogenous drop in analyst coverage and a firm's asynchronous search behaviour is less pronounced when the firm in question has proven its ability to capture valuable innovation opportunities via high innovation performance.