Do analysts’ recommendations reflect co-opted boards?
ISSN: 1472-0701
Article publication date: 17 July 2020
Issue publication date: 21 August 2020
Abstract
Purpose
This study aims to examine whether co-opted directors influence analysts’ recommendations. As information intermediaries, financial analysts should incorporate the quality of corporate governance into their valuation because well-governed firms are associated with lower agency costs and better performance. Co-opted directors are those appointed after the incumbent chief executive officer assumes office. The authors investigate whether board co-option has an effect on analyst recommendations.
Design/methodology/approach
The present study uses univariate analysis, multi-variate regression analysis and conduct a natural experiment using the Sarbanes-Oxley as an exogenous shock.
Findings
The results show that firms with fewer co-opted directors tend to receive more favorable recommendations, suggesting that analysts favor firms with strong corporate governance. The results hold even after controlling for various firm characteristics, including the traditional measures of board quality, i.e. board size and independent directors.
Originality/value
The paper is the first of its kind and offers evidence on the effect of co-opted directors on analyst recommendations. The results contribute to the literature both in corporate governance and in financial intermediaries, where analysts play a crucial role in providing information to the various participants in financial markets.
Keywords
Acknowledgements
Funding: This research was funded by Chulalongkorn University under the Ratchadapisek Sompoch Endowment Fund (2020) through the Collaborating Center for Labor Research at Chulalongkorn University (CU-Collar) (763008) and the Center of Excellence in Management Research for Corporate Governance and Behavioral Finance. Part of this research was carried out while Pornsit Jiraporn served as Visiting Professor of Finance at SASIN School of Management, Chulalongkorn University, in Bangkok, Thailand.
Citation
Papangkorn, S., Chatjuthamard, P., Jiraporn, P. and Phiromswad, P. (2020), "Do analysts’ recommendations reflect co-opted boards?", Corporate Governance, Vol. 20 No. 6, pp. 1091-1103. https://doi.org/10.1108/CG-10-2019-0310
Publisher
:Emerald Publishing Limited
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