Analyst coverage and intangible assets

This study examines the relation between analysts' incentives to cover firm s and the extent of their intangible assets. Because intangible assets typi cally are unrecognized and estimates of their fair values are not disclosed , absent analyst coverage firms with more intangible assets likely have les s informative prices. Accordingly, we expect analysts have greater incentiv es to cover firms with more intangible assets and, thus, predict they have higher analyst coverage. As predicted, we find that analyst coverage is sig nificantly greater for firms with larger research and development and adver tising expenses relative to their industry, and for firms in industries wit h larger research and development expense. We also predict and find that an alyst coverage is increasing in firm size, growth, trading volume, equity i ssuance, and perceived mispricing, and is decreasing in the size of the fir m's analysts' brokerage houses and the effort analysts expend to follow the firm. These findings indicate that analyst coverage depends on private ben efits and costs of covering a firm. We also test hypotheses related to anal yst effort. We predict and find that analysts expend greater effort to foll ow firms with more intangible assets, after controlling for other factors a ssociated with analyst effort. Our evidence indicates that intangible asset s, most of which are not recognized in firms' financial statements, are ass ociated with greater incentives for analysts to cover such firms, and great er costs of coverage. An open question is whether financial statement recog nition of intangible assets could more efficiently provide information abou t such assets to investors.