Do analysts matter for governance? Evidence from natural experiments
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...
| Main Authors: | , , |
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| Other Authors: | |
| Format: | Journal Article |
| Language: | English |
| Published: |
2015
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| Online Access: | https://hdl.handle.net/10356/106948 http://hdl.handle.net/10220/25250 |
| _version_ | 1811680151119855616 |
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| author | Chen, Jonas Tao Harford, Jarrad Lin, Chen |
| author2 | Nanyang Business School |
| author_facet | Nanyang Business School Chen, Jonas Tao Harford, Jarrad Lin, Chen |
| author_sort | Chen, Jonas Tao |
| collection | NTU |
| description | 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. |
| first_indexed | 2024-10-01T03:20:29Z |
| format | Journal Article |
| id | ntu-10356/106948 |
| institution | Nanyang Technological University |
| language | English |
| last_indexed | 2024-10-01T03:20:29Z |
| publishDate | 2015 |
| record_format | dspace |
| spelling | ntu-10356/1069482023-05-19T06:44:41Z Do analysts matter for governance? Evidence from natural experiments Chen, Jonas Tao Harford, Jarrad Lin, Chen Nanyang Business School DRNTU::Business::Finance 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. Accepted version 2015-03-18T11:25:18Z 2019-12-06T22:21:45Z 2015-03-18T11:25:18Z 2019-12-06T22:21:45Z 2015 2015 Journal Article Chen, T., Harford, J., & Lin, C. (2015). Do analysts matter for governance? Evidence from natural experiments. Journal of financial economics, 115(2), 383-410. 0304-405X https://hdl.handle.net/10356/106948 http://hdl.handle.net/10220/25250 10.1016/j.jfineco.2014.10.002 en Journal of financial economics © 2014 Elsevier B.V. This is the author created version of a work that has been peer reviewed and accepted for publication by Journal of Financial Economics, Elsevier B.V.. It incorporates referee’s comments but changes resulting from the publishing process, such as copyediting, structural formatting, may not be reflected in this document. The published version is available at: [http://dx.doi.org/10.1016/j.jfineco.2014.10.002]. application/pdf |
| spellingShingle | DRNTU::Business::Finance Chen, Jonas Tao Harford, Jarrad Lin, Chen Do analysts matter for governance? Evidence from natural experiments |
| title | Do analysts matter for governance? Evidence from natural experiments |
| title_full | Do analysts matter for governance? Evidence from natural experiments |
| title_fullStr | Do analysts matter for governance? Evidence from natural experiments |
| title_full_unstemmed | Do analysts matter for governance? Evidence from natural experiments |
| title_short | Do analysts matter for governance? Evidence from natural experiments |
| title_sort | do analysts matter for governance evidence from natural experiments |
| topic | DRNTU::Business::Finance |
| url | https://hdl.handle.net/10356/106948 http://hdl.handle.net/10220/25250 |
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