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Monitoring and corporate disclosure: Evidence from a natural experiment

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  • Irani, Rustom M.
  • Oesch, David

Abstract

Using an experimental design that exploits exogenous reductions in coverage resulting from brokerage house mergers, we find that a reduction in coverage causes a deterioration in financial reporting quality. The effect of coverage on disclosure is more pronounced for firms with weak shareholder rights, consistent with a substitution effect between analyst monitoring and other corporate governance mechanisms. The effects we uncover using our experimental design are an order of magnitude larger than estimates from ordinary least squares regressions that do not account for the endogeneity of coverage. Overall, our results suggest that security analysts monitor managers and entrenched managers adopt less informative disclosure policies in the absence of such scrutiny.

Suggested Citation

  • Irani, Rustom M. & Oesch, David, 2013. "Monitoring and corporate disclosure: Evidence from a natural experiment," Journal of Financial Economics, Elsevier, vol. 109(2), pages 398-418.
  • Handle: RePEc:eee:jfinec:v:109:y:2013:i:2:p:398-418
    DOI: 10.1016/j.jfineco.2013.02.021
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    References listed on IDEAS

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    Cited by:

    1. repec:eee:finana:v:56:y:2018:i:c:p:281-291 is not listed on IDEAS
    2. Adhikari, Binay K., 2016. "Causal effect of analyst following on corporate social responsibility," Journal of Corporate Finance, Elsevier, vol. 41(C), pages 201-216.
    3. Bing Guo & David Pérez-Castrillo & Anna Toldrà-Simats, 2017. "Firms' Innovation Strategy under the Shadow of Analyst Coverage," CESifo Working Paper Series 6574, CESifo Group Munich.
    4. Derrien, François & Kecskés, Ambrus & Mansi, Sattar A., 2016. "Information asymmetry, the cost of debt, and credit events: Evidence from quasi-random analyst disappearances," Journal of Corporate Finance, Elsevier, vol. 39(C), pages 295-311.
    5. repec:bla:stratm:v:38:y:2017:i:13:p:2623-2646 is not listed on IDEAS
    6. Houdou Basse Mama & Alexander Bassen, 2017. "Neglected disciplinary effects of investor relations: evidence from corporate cash holdings," Journal of Business Economics, Springer, vol. 87(2), pages 221-261, February.
    7. Chen, Tao & Harford, Jarrad & Lin, Chen, 2015. "Do analysts matter for governance? Evidence from natural experiments," Journal of Financial Economics, Elsevier, vol. 115(2), pages 383-410.
    8. Xu, Nianhang & Chen, Qinyuan & Xu, Yan & Chan, Kam C., 2016. "Political uncertainty and cash holdings: Evidence from China," Journal of Corporate Finance, Elsevier, vol. 40(C), pages 276-295.
    9. repec:eee:jaecon:v:63:y:2017:i:2:p:179-206 is not listed on IDEAS
    10. Billett, Matthew T. & Garfinkel, Jon A. & Yu, Miaomiao, 2017. "The effect of asymmetric information on product market outcomes," Journal of Financial Economics, Elsevier, vol. 123(2), pages 357-376.
    11. repec:eee:mulfin:v:41:y:2017:i:c:p:23-46 is not listed on IDEAS
    12. repec:eee:ememar:v:32:y:2017:i:c:p:1-27 is not listed on IDEAS
    13. repec:eee:corfin:v:45:y:2017:i:c:p:84-103 is not listed on IDEAS
    14. Chen, Tao & Xie, Lingmin & Zhang, Yuanyuan, 2017. "How does analysts' forecast quality relate to corporate investment efficiency?," Journal of Corporate Finance, Elsevier, vol. 43(C), pages 217-240.
    15. repec:cte:wbrepe:wb1503 is not listed on IDEAS
    16. Allen, Arthur & Francis, Bill B. & Wu, Qiang & Zhao, Yijiang, 2016. "Analyst coverage and corporate tax aggressiveness," Journal of Banking & Finance, Elsevier, vol. 73(C), pages 84-98.
    17. repec:eee:corfin:v:48:y:2018:i:c:p:442-459 is not listed on IDEAS

    More about this item

    Keywords

    Analyst coverage; Corporate governance; Reporting decisions;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General

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