Do analysts matter for governance? Evidence from natural experiments

Abstract

Building on two sources of exogenous shocks to analyst coverage-broker closures and mergers, we explore the causal effects of analyst coverage on mitigating managerial expropriation of outside shareholders. We find that as a firm experiences an exogenous decrease in analyst coverage, shareholders value internal cash holdings less, its CEO receives higher excess compensation, its management is more likely to make value-destroying acquisitions, and its managers are more likely to engage in earnings management activities. Importantly, we find that most of these effects are mainly driven by the firms with smaller initial analyst coverage and less product market competition. We further find that after exogenous brokerage exits, a CEO's total and excess compensation become less sensitive to firm performance in firms with low initial analyst coverage. These findings are consistent with the monitoring hypothesis, specifically that financial analysts play an important governance role in scrutinizing management behavior, and the market is pricing an increase in expected agency problems after the loss in analyst coverage.

Firms’ innovation strategy under the shadow of analyst coverage

“…The recent paper by Chen, Harford, and Lin (2015) shows a positive monitoring role of analysts: following a decrease in coverage shareholders value internal cash holdings less, their CEOs receive higher excess compensation, and they are more likely to engage in value-destroying acquisitions.…”

“…The same arguments hold for the first-stage regression of the number of analysts and CVC investments in the next section. 29 A recent paper by Chen, Harford, and Lin (2015) shows that firms that experience an exogenous decrease in analyst coverage are more likely to make value-destroying acquisitions. Their result suggests that financial analysts play a governance role that leads managers to acquire better targets.…”

Short Selling and Executive Pay-for-Performance Sensitivity

“…Karpoff et al (2010) [4], Hirshleifer et al (2011) [5] found that short selling can restrain the financial fraud. Chen et al (2015) [12], Fang et al (2016) [13] found that short selling can restrain earnings management and improve the reliability of financial information. Li (2017) [14] found that the introduction of short selling significantly improved the quality of the target company's information disclosure.…”

Poder empresarial e cobertura de analistas financeiros

“…Lang & Lundholm, 1996;Lang et al, 2004). Outros estudos também destacam o impacto do acompanhamento de analistas no custo de capital e no ambiente corporativo das empresas (Chen et al, 2014;Cheng & Subramanyam, 2008;Easley & O'hara, 2004). Relacionar se o acompanhamento de analistas e o ambiente informacional é impactado pela diretoria executiva da empresa é trazido por Jiraporn et al (2012) de modo único na literatura e contribui para um melhor entendimento entre a influência das ações dos CEOs e seus impactos que permeiam todo ambiente corporativo, inclusive a cobertura de analistas financeiros.…”

“…O papel dos analistas financeiros como monitores dos executivos é analisado por Chen et al (2014). Através de um experimento natural 7 , foi verificado que a redução do nú-mero de analistas financeiros resulta em uma perda do valor das reservas direcionadas ao acionista, e a um aumento de salários dos executivos.…”