Does corporate governance affect financial analysts’ stock recommendations, target prices accuracy and earnings forecast characteristics? An empirical investigation of US companies

Empirical Economics - Tập 63 - Trang 2125-2171 - 2022
Ahmed Bouteska1, Mehdi Mili2
1Faculty of Economics and Management of Tunis, Tunis El Manar University, Tunis, Tunisia
2Department of Economics and Finance, College of Business Administration, University of Bahrain, Zallaq, Bahrain.

Tóm tắt

This paper investigates how corporate governance quality affects the analyst’s stock recommendations, forecast efficiency and target price accuracy on New York Stock Exchange. In particular, as corporate governance is often uncertain and ambiguous to investors, expert financial advisors may use transparent corporate governance information to set their recommendations and improve the level of accuracy of their earnings forecasts. According to agency and signaling theories, good governance mechanisms aim to mitigate agency conflicts and boost corporate transparency. Thus, we argue that they can serve as mediators during the forecasting process and we expect a strong significant relationship between the effectiveness of corporate governance mechanisms and analyst activity. Five hypotheses are tested with a large sample of 154 US market firms over a 17-year period (2004–2020). Our empirical findings point out some special features of US stock markets. We find evidence that analysts tend to issue favorable recommendations, more accurate, less dispersed and more optimistic earnings forecasts for most well-governed firms. Furthermore, we show that higher-quality governance transparency is an important determinant of financial analysts’ behavior in the USA. The results also indicate that higher-quality governance appears valuable with financial analysts during pre- and post-crisis period, while it is not generally detected in COVID-19 times. However, we report the weakness of analysts’ outputs–governance quality for small firms. Thus, our findings cast doubts over the corporate governance-based analyst practices of US small and unaffiliated firms. The main implication of these findings is to improve understanding of how investors’ behavioral characteristics affect the transmission mechanism of information in money market and capital market prices. This paper has important implications for the decision making of financial analysts and investors by requesting firms to significantly improve their information environments in the good and bad times. It also offers insights into how firms establishing good corporate governance mechanisms can help the analysts to predict future stock prices.

Tài liệu tham khảo

Abarbanell JS, Bushee BJ (1997) Fundamental analysis, future earnings and stock prices. J Account Res 35(1):1–24 Abbott LJ, Park Y, Parker S (2000) The effect of audit committee activity and independence on corporate fraud. Manag Financ 26(11):55–67 Abdul Wahab E, Pitchay AA, Ali R (2015) Culture, corporate governance and analysts forecast in Malaysia. Asian Rev Account 23(3):232–255 Abdullah SN, Nasir NM (2004) Accrual management and the independence of the board of directors and audit committees. IIUM Int J Econ Manag Account 12:49–80 Aboody D, Barth M, Kasznik R (2006) Revaluations of fixed assets and future firm performance: evidence from UK. J Account Econ 26(1/3):149–178 Adams R, Ferreira D (2007) A theory of friendly boards. J Financ 62(1):217–250 Adams R, Ferreira D (2009) Women in the boardroom and their impact on governance and performance. J Financ Econ 94(2):291–309 Aggarwal R, Erel I, Ferreira M, Matos P (2011) Does governance travel around the world? evidence from institutional investors. J Financ Econ 100(1):154–181 Ajinkya B, Bhojraj S, Sengupta P (2005) The association between outside directors, institutional investors and the properties of management earnings forecasts. J Account Res 43(3):343–376 Ali A, Chen TY, Radhakrishman S (2007) Corporate disclosures by family firms. J Account Econ 44(1–2):238–286 Almeida JEF, Dalmácio FV (2015) The effects of corporate governance and product market competition on analysts’ forecasts: evidence from the Brazilian capital market. Int J Account 50(3):316–339 Alonso P, Palenzuela V, Iturriaga F (2000) Managers' discretionary behavior, earnings management and corporate governance: an empirical international analysis Working Paper Universidad de Valladolid Antonczyk R, Breuer W, Saltzmann A (2014) Long-term orientation and relationship lending: a cross-cultural study on the effect of time preferences on the choice of corporate debt. Manag Int Rev 54(3):381–415 Aste LJ (1999) Reforming french corporate governance: a return to the two-tier board? George Wash J Int Law Econ 32:1–72 Autore D, Kovacs T, Sharma V (2009) Do analyst recommendations reflect shareholder rights? J Bank Finance 33:193–202 Barniv R, Myring M, Thomas W (2005) The association between the legal and financial reporting environments and forecast performance of individual analysts. Contemp Account Res 22(4):727–758 Barron O, Stuerke P (1998) Dispersion in analysts’ earnings forecasts as a measure of uncertainty. J Acc Audit Financ 13(Summer):245–270 Barron O, Byard D, Kile C, Riedl E (2002) High-technology intangibles and analysts’ forecasts. J Acc Res 40(2):289–312 Barth M, Landsman W, Rendleman R (1998) Option pricing-based bond value estimates and a fundamental components approach to account for corporate debt. Account Rev 73(1):73–102 Bartov E, Mohanram P, Nissim D (2007) Managerial discretion and the economic determinations of the disclosure volatility parameter for valuing ESOs. Rev Acc Stud 12(1):155–179 Basu A, Coe NB, Chapman CG (2018) 2SLS vs 2SRI: Appropriate methods for rare outcomes and/or rare exposures. Health Econ 27:937–955 Be´dard J, Chtourou SM, Courteau L (2004) The effect of audit committee expertise, independence, and activity on aggressive earnings management Audit J Pract Theory 23(2): 13–35 Beasley MS (1996) An empirical analysis of the relation between the board of director composition and financial statement fraud. Account Rev 71(4):443–465 Bebchuk L, Cohen A, Ferrell A (2009) What matters in corporate governance? Rev Financial Stud 22(2):783–827 Bertoni F, Meoli M, Vismara S (2014) Board independence, ownership structure and the valuation of IPOs in continental Europe. Corp Gov 22(2):116–131 Bhat G, Hope OK, Kang T (2006) Does corporate governance transparency affect the accuracy of analyst forecasts? Account Finance 46(5):715–732 Bilinski P, Lyssimachou D, Walker M (2013) Target price accuracy: international evidence. Account Rev 88:825–851 Bilinski P, Lyssimachou D, Walker M (2011) Target price optimism around the world: International evidence. Working paper, University of Manchester Bonini S, Zanetti L, Bianchini R, Salvi A (2010) Target price accuracy in equity research. J Bus Financ Acc 37(9–10):1177–1217 Boone AL, Field LC, Karpoff JM, Raheja CG (2007) The determinants of corporate board size and composition: an empirical analysis. J Financ Econ 85:66–101 Boubaker S, Labegorre F (2008) Ownership structure, corporate governance and analyst following: a study of French listed firms. J Bank Finance 32(6):961–976 Bouteska A (2018) The influence of corporate governance mechanisms on the behavior of financial analysts of US Firms: an empirical analysis. Advances in financial economics. In: John K, Makhija AK, Ferris SP (eds) International corporate governance and regulation, vol. 20, pp. 131–172 Bradshaw MT (2004) How do analysts use their earnings forecasts in generating stock recommendations? Account Rev 79:25–50 Bradshaw MT, Richardson SA, Sloan RG (2006) The relation between corporate financing activities, analysts’ forecasts and stock returns. J Account Econ 42(1–2):53–85 Bradshaw MT, Brown L, Huang K (2012) Do sell-side analysts exhibit differential target price forecasting ability? Rev Acc Stud 18(4):930–955 Bradshaw MT, Brown LD, Huang K (2013) Do sell-side analysts exhibit differential target price forecasting ability? Rev Acc Stud 18:930–955 Bradshaw MT, Huang K, Tan H (2019) The effects of analyst-country institutions on biased research: evidence from target prices. J Account Res 57(1):85–120 Brown LD (1997) Analyst forecasting errors: additional evidence. Financ Anal J 53(6):81–88 Bushman R, Smith A (2001) Financial accounting information and corporate governance. J Account Econ 32:237–333 Bushman R, Piotroski J, Smith A (2004a) What determines corporate transparency? J Account Res 42:207–252 Bushman RM, Chen Q, Engel E, Smith A (2004b) Financial accounting information, organizational complexity and corporate governance systems. J Account Econ 37:167–201 Byard D, Li Y, Weintrop J (2006) Corporate governance and the quality of financial analysts’ information. J Account Public Policy 25(5):609–625 Carcello JV, Nagy AL (2004a) Client size, auditor specialization and fraudulent financial reporting. Manag Audit J 19(5):651–668 Carcello JV, Nagy AL (2004b) Audit firm tenure and fraudulent financial reporting. Audit J Pract Theory 23(2):55–69 Carcello JV, Neal TL (2003) Audit committee characteristics and auditor dismissals following ‘“new”’ going-concern reports. Account Rev 78:95–117 Chen T, Harford J, Lin C (2015) Do analysts matter for governance? evidence from natural experiments. J Financ Econ 115:383–410 Chiang H (2005) An empirical study of corporate governance and corporate performance. J Law Econ 31(1):122–140 Chiang H-T, Chia F (2005) Analyst’s financial forecast accuracy and corporate transparency. Proc Acad Account Financial Stud Memphis 10(1):9–14 Chou RK and Shiah-Hou R (2010a) Quality of corporate governance, analyst coverage, and analyst forecast error: do analysts serve as external monitors to managers? Working paper series Chou RK, Shiah-Hou R (2010b) Quality of corporate governance, analyst coverage, and analyst forecast error: do analysts serve as external monitors to managers? Working paper Chung K, Zhang H (2011) Corporate governance and institutional ownership. J Financial Quantitative Anal 46(1):247–273 Chung H, Judge WQ, Li Y-H (2015) Voluntary disclosure, excess executive compensation and firm value. J Corp Finan 32:64–90 Clarke J, Ferris S, Jayaraman N, Lee J (2006) Are analyst recommendations biased? evidence from corporate bankruptcies. J Financial Quantitative Anal 41(1):169–196 Clarkson PM (2000) Auditor quality and the accuracy of management earnings forecasts. Contemp Account Res 17:595–622 Clement MB (1999) Analyst forecast accuracy: do ability, resources, and portfolio complexity matter? J Account Econ 27:285–303 Cohen L, Lou D (2012) Complicated firms. J Financ Econ 104:383–400 Coles J, Daniel ND, Naveen L (2008) Boards: does one size fits all? J Financ Econ 87(2):329–356 Conrad J, Cornell B, Landsman W, Rountree B (2006) How do analyst recommendations respond to major news? J Financial Quantitative Anal 41(1):25–49 Core JE, Holthausen RW, Larcker DF (1999) Corporate governance, chief executive officer compensation and firm performance. J Financ Econ 51(3):371–406 Cox C (1985) Further evidence on the representativeness of management earnings forecasts. Account Rev 60:692–701 Damodaran A (2006) Damodaran on valuation, 2nd edn. Wiley, New York Dechow PM, Sloan RG, Hutton AP (2000) The relation between analysts’ forecasts of long-term earnings growth and stock price performance following equity offerings. Contemp Account Res 17(1):1–32 Demirakos EG, Strong NC, Walker M (2010) Does valuation model choice affect target price accuracy? Eur Account Rev 19:35–72 Duru A, Reeb D (2002) International diversification and analysts’ forecast accuracy and bias. Account Rev 77(2):415–433 Dyck A, Morse A, Zingales L (2006) Who blows the whistle on corporate fraud? Unpublished working paper University of Toronto, Toronto, Canada Eisenherdt M (1989) Agency theory: an assessment and review. Acad Manag Rev 14(1):57–74 Easterwood J, Nutt S (1999) Inefficiency in analysts’ earnings forecasts: systematic misreaction or systematic optimism. J Financ 54(5):1777–1797 Fama EF (1980) Agency problems and the theory of the firm. J Polit Econ 88:288–307 Fama EF, French KR (1992) The cross-section of expected stock returns. J Financ 47(2):427–486 Fama EF, Jensen MC (1983) Separation of ownership and control. J Law Econ 26:301–325 Farooq O (2017) What determines the value of recommendation change? a preliminary analysis. J Appl Econ 49(16):1557–1570 Firth M, Smith A (1992) The accuracy of profits forecasts in initial public offering prospectuses. Account Bus Res 22:239–247 Firth M, Kwok BCH, Liau-Tan CK, Yeo GH (1995) Accuracy of profit forecasts contained in IPO prospectuses. Account Bus Rev 2:55–83 Firth M, Fung PMY, Rui OM (2006) Corporate performance and CEO compensation in China. J Corp Finan 12:693–714 Frankel R, Kothari S, Weber J (2006) Determinants of the informativeness of analyst research. J Account Econ 41(1/2):295–327 Gregoire J, Marcet F (2014) Analysts target price accuracy and investors’ reaction: Chilean stock market evidence. Mexican J Econ Finance 9(2):153–173 Gul F, Hutchinson M, Lai K (2013) Gender-diverse board and properties of analyst earnings forecasts. Account Horiz 27(3):511–538 Hagerman RL, Ruland W (1979) The accuracy of management forecasts and forecasts of simple alternative models J Econ Bus Spring,Summer 31(3):172–179 He J, Tian X (2013) The dark side of analyst coverage: the case of innovation. J Financial Econ 109:856–878 Healy P, Palepu K (2001) Information asymmetry, corporate disclosure, and the capital markets: a review of the empirical disclosure literature. J Account Econ 31:405–440 Higgs D (2003) Review of the role and effectiveness of non-executive directors Report to the UK Department of Trade and Industry, London Hoitash U, Hoitash R, Bedard JC (2009) Corporate governance and internal control over financial reporting: a comparison of regulatory regimes. Account Rev 84(3):839–867 Hong H, Kubik JD (2003) Analyzing the analysts: Career concerns and biased earnings forecasts. J Finance 58:313–351 Hope OK (2003a) Accounting policy disclosures and analysts’ forecasts. Contemp Account Res 20(2):235–272 Hope OK (2003b) Disclosure practices, enforcement of accounting standards, and analysts’ forecast accuracy. J Account Res 41(2):235–272 Hope OK (2003c) Analyst following and the influence of disclosure components, IPOs and ownership concentration. Asia-Pac J Account Econ 10(2):117–141 Howe J, Unlu E, Yan X (2009) The predictive content of aggregate analyst recommendations. J Account Res 47(3):799–821 Huang H-H, Chan M-L, Chang C-H, Wong J-L (2012) Is corporate governance related to the conservatism in management earnings forecasts? Emerg Mark Finance Trade 48(Suppl 2):105–121 Jegadeesh N, Kim W (2006) Value of analyst recommendations: international evidence. J Financial Mark 9:274–309 Jegadeesh N, Kim J, Krische SD, Lee CMC (2004) Analyzing the analysts: when do recommendations add value? J Financ 59(3):1083–1124 Jensen MC (1993) The modern industrial revolution, exit, and the failure of internal control systems. J Finance 48(3):831–880 Jensen MC, Meckling WH (1976) Theory of the firm: managerial behavior, agency costs and ownership structure. J Financ Econ 3(4):305–360 Kao L, Chen A (2004) The effects of board characteristics on earnings management. Corp Ownersh Control 1(3):96–107 Karamanou I, Vafeas N (2005) The association between corporate boards, audit committees, and management earnings forecasts: an empirical analysis. J Account Res 43:453–486 Keay A (2017) Stewardship theory: is board accountability necessary? Int J Law Manag 59(6):1292–1314 Kells S (2020) Impacts of COVID-19 on corporate governance and assurance, international finance and economics, and non-fiction book publishing: some personal reflections. J Account Organ Chang 16(4):629–635 Kent P, Routledge J, Stewart J (2010) Innate and discretionary accruals quality and corporate governance. Account Finance 50:171–195 Kerl AG (2011) Target price accuracy. Bus Res 4(1):74–96 La Porta R, Lopez-de-Silanes F, Shleifer A, Vishny R (2000) Investor protection and corporate governance. J Financ Econ 58:3–27 Lang MH, Lundholm RJ (1996) Corporate disclosure policy and analyst behavior. Account Rev 71:467–492 Lang M, Lins K, Miller D (2004) Concentrated control, analyst following, and valuation: do analysts matter most when investors are protected least? J Account Res 42(3):589–623 Larcker DF, Richardson SA, Tuna Ä (2007) Corporate governance, accounting outcomes, and organizational performance. Account Rev 82(4):963–1008 Lim T (2001) Rationality and analysts’ forecast bias. J Financ 56(1):369–385 Lin JC, Tai VW (2013) Corporate governance and analyst behavior: evidence from an emerging market. Asia Pac J Financ Stud 42:228–261 Lipton M, Lorsch JW (1992) A modest proposal for improved corporate governance. Bus Lawyer 48:59–77 Ljungqvist A, Marston F, Starks LT, Wei KD, Yan H (2007) Conflicts of interest in sell-side research and the moderating role of institutional investors. J Financ Econ 85:420–456 Loderer C, Peyer U (2002) Board overlap, seat accumulation and share prices. Eur Financ Manag 8:165–192 Maaloul A, Ben Amar W, Zeghal D (2016) Voluntary disclosure of intangibles and analysts’ earnings forecasts and recommendations. J Appl Acc Res 17(4):1–28 Malmendier U, Shanthikumar D (2007) Are small investors naive about incentives? J Financ Econ 85:457–489 McConnell JJ, Servaes H (1990) Additional evidence on equity ownership and corporate value. J Financ Econ 27:595–612 McKelvey RD, Zavoina W (1975) A statistical model for the analysis of ordinal level dependent variables. J Math Soc 4:103–200 Michaely R, Womack K (2005) Brokerage recommendations: stylized characteristics, market responses and biases Adv Behav Finance II 389–422 Mikhail M, Walther B, Willis R (1997) Do security analysts improve their performance with experience? J Account Res 35(Supplement):131–157 Miletkov M, Poulsen A, Wintoki B (2014) The role of corporate board structure in attracting foreign investors. J Corp Finan 29:143–157 Mitra S, Deis DR, Hossain M (2007) The empirical relationship between ownership characteristics and audit fees. Rev Quant Financ Acc 28(3):257–285 Morck R, Shleifer A, Vishny R (1988) Management ownership and market valuation. J Financ Econ 20:293–315 Muda I, Maulana W, Siregar HS, Indra N (2018) The analysis of effects of good corporate governance on earnings management in Indonesia with panel data approach. Iran Econ Rev 22(2):599–625 Nazir MS, Afza T (2018) Impact of corporate governance on discretionary earnings management, a case of Pakistani firms. Pak Econ Soc Rev 56(1):157–184 Nguyen H, Faff R (2007) Impact of board size and board diversity on firm value: Australian evidence. Corp Ownersh Control 4(2):24–32 Nurwati A, Zaluki A, Wan-Hussin WN (2010) Corporate governance and earnings forecasts accuracy. Asian Rev Account 18(1):50–67 Pedwell K, Warsame H, Neu D (1994) The accuracy of Canadian and New Zealand earnings forecasts: a comparison of voluntary versus compulsory disclosures. J Int Account Audit Tax 3:221–236 Piotroski JD, Roulstone DT (2004) The influence of analysts, institutional investors, and insiders on the incorporation of market, industry, and firm-specific information into stock prices. Account Rev 79(4):1119–1151 Richardson VJ (2000) Information asymmetry and earnings management: some evidence. Rev Quantitative Finance Acc 15(4):325–347 Rose P (2007) The corporate governance industry. J Corp Law 32(4):887–926 Schmid T (2013) Control considerations, creditor monitoring, and the capital structure of family firms. J Bank Finance 37(2):257–272 Schutte M, Unlu E (2009) Do security analysts reduce noise? Financial Anal J 65(3):1–15 Shleifer A, Vishny R (1997) A survey of corporate governance. J Financ 52(2):737–783 Shleifer A, Vishny RW (1986) Large shareholders and corporate control. J Polit Econ 94(3–1):461–488 Song X, Zheng W (2014) Ownership structure, stock volatility and analyst independence. China Finance Rev Int 4(2):187–208 Song C, Thomas W, Yi H (2010) Value relevance of Fars no 157 fair value hierarchy information and the impact of corporate governance mechanisms. Account Rev 85(4):1375–1410 Srinidhi B, Gul FA, Tsui JSL (2011) Female directors and earnings quality. Contemp Account Res 28(5):1610–1644 Taylor S (2007) Ownership structure and analysts’ earnings forecasts: UK evidence. Working paper Terza J (2017) Two-stage residual inclusion estimation in health services: research and health economics. Health Serv Res 53(3):1890–1899 Tinaikar S (2012) Outside directors, litigation environment, and management earnings forecasts. Account Perspect 11(1):1–29 Tyson L (2003) The Tyson report on the recruitment and development of non-executive directors Available at http://www.london.edu/tysonreport Vafeas N (2000) Board structure and the informativeness of earnings. J Account Public Policy 19:139–160 Vargas-Hernȃndez JG, Cruz TME (2018) Corporate governance and agency theory: megacable case. Corp Gov Sustain Rev 2(1):59–69 Viénot M (1995) The Board of Directors of Listed Companies in France Report of the “Viénot Committee” Paris Viénot M (1999) Recommendations of the Committee on Corporate Governance (Viénot II Report) AFEP-MEDEF Committee Paris Wintoki MB, Linck JS, Netter JM (2012) Endogeneity and the dynamics of internal corporate governance. J Financ Econ 105(3):581–606 Wiseman RM, Cuevas-Rodriguez G, Gomez-Mejia LR (2012) Towards a social theory of agency. J Manag Stud 49:202–222 Xie B, Davidson WN III, DaDalt PJ (2003) Earnings management and corporate governance: the role of the board and the audit committee. J Corp Finan 9:295–316 Xu L, Tang A (2012) Internal control material weakness, analysts’ accuracy and bias, and brokerage reputation. Rev Quant Financ Acc 39(1):27–53 Yermack D (1996) Higher market valuation of companies with a small board of directors. J Financ Econ 40:185–221 Yu F (2008) Analyst coverage and earnings management. J Financ Econ 88(2):245–271 Yu M (2010) Analyst forecast properties, analyst following and governance disclosures: a global perspective. J Int Account Audit Tax 19:1–15 Yu M (2011) Analyst recommendations and corporate governance in emerging markets. Int J Account Inf Manag 19(1):34–52 Yu M, & Wang Y (2018) Firm-specific corporate governance and analysts’ earnings forecast characteristics: evidence from Asian stock markets. International Journal of Accounting and Information Management, 26(3), 335–361