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...

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Main Authors: Chen, Jonas Tao, Harford, Jarrad, Lin, Chen
Other Authors: Nanyang Business School
Format: Article
Language:English
Published: 2015
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Online Access:https://hdl.handle.net/10356/106948
http://hdl.handle.net/10220/25250
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Institution: Nanyang Technological University
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spelling sg-ntu-dr.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
institution Nanyang Technological University
building NTU Library
continent Asia
country Singapore
Singapore
content_provider NTU Library
collection DR-NTU
language English
topic DRNTU::Business::Finance
spellingShingle DRNTU::Business::Finance
Chen, Jonas Tao
Harford, Jarrad
Lin, Chen
Do analysts matter for governance? Evidence from natural experiments
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.
author2 Nanyang Business School
author_facet Nanyang Business School
Chen, Jonas Tao
Harford, Jarrad
Lin, Chen
format Article
author Chen, Jonas Tao
Harford, Jarrad
Lin, Chen
author_sort Chen, Jonas Tao
title Do analysts matter for governance? Evidence from natural experiments
title_short 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_sort do analysts matter for governance? evidence from natural experiments
publishDate 2015
url https://hdl.handle.net/10356/106948
http://hdl.handle.net/10220/25250
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