Analyst recommendations and corporate governance in emerging markets

Purpose - The purpose of this paper is to examine whether analyst recommendations are influenced by the strength of corporate governance in emerging markets. Design/methodology/approach - It is expected that analysts take into consideration the corporate governance mechanisms when they set their recommendations because better‐governed companies are associated with less risk from management and have value improvement potentials. This hypothesis is tested with a sample of 805 firms in 26 countries from emerging markets. Corporate governance effectiveness is measured by the ratings compiled by Credit Lyonnais Securities Asia, which are based on a series of corporate governance characteristics. Findings - Results show that analysts tend to issue favorable recommendations for firms with better corporate governance mechanisms. Furthermore, this evidence is concentrated in countries with a code law origin where investor protection is relatively weak. Practical implications - This paper has important implications for financial analysts and investors by offering insights into how analysts help the market efficiently incorporate the quality of corporate governance in the code law countries of emerging markets. This paper is also of interest to companies by highlighting the significance of establishing good corporate governance mechanisms. Originality/value - Examining the association between analyst recommendations and the strength of corporate governance adds to the research on the association between corporate governance and analyst activity and therefore highlight the role analysts play in the valuation of corporate governance.