Product market competition, competitive strategy, and analyst coverage

This paper examines how product market competition and strategic interactions among peer firms influence analyst coverage. First, we hypothesize that product market competition increases both the demand and supply of analyst coverage. Using three variations of industry concentration ratios and a firm specific measure of competition, we test and find a positive and significant effect of market competition on analyst coverage. Second, we explore an information transfer channel through which product market affects analyst coverage. We hypothesize that information flows more freely among firms selling similar products. Such information flows lowers analyst information collection and processing costs, which in turn increases analyst coverage. Using product similarity index developed by Hoberg and Phillips (J Polit Econ 124(5):1423–1465, 2016) to capture the effect of information transfer, we find that analyst coverage increases with product similarity. Third we examine the role of competitive strategy in analyst coverage. We split our sample into markets of strategic complements and strategic substitutes. We find that the effect of market competition and analyst coverage is more pronounced in markets where firms compete as strategic complements.