Dark side of analyst coverage? The case of cash holding adjustment toward the optimal level

Abstract

We examine the association between analyst coverage and the speed at which firms adjust their cash holdings toward the optimal level. We find that firms exhibit a slower adjustment speed toward the optimal level of cash holdings when covered by analysts, and when more analysts cover them. This finding is stronger when analysts cover firms which are smaller, audited by non-big accounting firms, without institutional investors, younger, and not affiliated with conglomerates, suggesting that firms under greater pressure from analysts are more likely to alter their cash holding policy based on analyst coverage. We also find that the finding is more pronounced when analyst forecasts are less accurate and more optimistic. Additional tests show that analyst coverage is positively associated with investment and payouts to shareholders even if firms have smaller cash holdings than the optimal level.