Analyst Following, Monitoring Effect And Corporate Behavior

In less than twenty years, with the development of capital market in China, the industry of securities analysts has also experienced a huge development from embryonic stage to regulation phase that has clear division of labor and large scale.In current capital market, the security analysts play a very important role as the information intermediary due to the information asymmetry between firms and investors. On the one hand, investors acquire information of listed companies through research report released by security analysts. On the other hand, the firms also need to expand their level of recognition within investors by means of security analysts. Merton (1987) propose the "Investor Recognition Hypothesis", which suggests that analysts following can enhance the level of recognition of companies for potential investors by improving the firms’ information transparency, then promote the investors to engage in trading activity, and reduce the cost of capital of companies.As the important position that security analysts in capital market, more and more literature centre on the security analysts and conduct research. Most of previous studies discuss about the analysts’ behavior and its effectiveness. Combined with the analysts’ job, many papers investigate the effectiveness of analysts’ following, earnings forecast report and recommendation report released by analysts.However, it should be noted that, previous studies mostly focus on the effect of security analysts on capital markets, but fewer of them discuss the effect on frims’ activities. Recently, scholars start to link the security analysts with the important topic in corporate finance, so as to gain insight into the effect of security analysts. Interestingly, existing literature find that the effect of security analysts on firms’ activities is not the only one, but exists two opposite effect.On the one hand, analysts following can improve corporate governance. Analysts usually have better specialized knowledge and investment experience, so as to better know about firm’s complicated financial information, and can find the potential problems in frims quickly. Meanwhile, analysts play the role as information disclosure when they release research report or earnings forecast report, then they can improve the information transparency, and reduce the agency problem within the firms. On the other hand, analysts’ forecast may put pressure on management. For example, if the profit reported by firms doesn’t achieve the analysts’ consensus forecast, this will lead to investors’ negative market reaction. This "pressure effect" eventually result in managements’ myopia behavior, which may distort the normal operating activities, and injure the benefits of shareholders.This dissertation studies the effect of security analysts mainly from the aspects of "monitoring effect" and "pressure effect". The first two part of empirical research focus on the influence of analysts following on firms’ tax aggressiveness and real earnings management activity, respectively. These two activities usually imply the serious principal-agent problem. If the "monitoring effect" works, analysts following can reduce the extent of firms’ tax aggressiveness and real earnings management. On the contrary, if the "pressure effect" works, firms may choose tax avoidance and real earnings management to manipulate profit covertly. Therefore, analysts following will increase the extent of firms’ tax aggressiveness and real earnings management. Through empirical tests, this dissertation finds that the influence of analysts following on these two activities both are "monitoring effect", which confirms the positive role of security analysts.The third part of empirical research is based on the need of analysts following from firms. Using the2008WenChuan earthquake as an exogenous event, this study find that, the firms that completely lose analysts coverage are tend to attract analysts following through donation. The motivation maybe that analysts following can give a "governance" signal to outside investors, meanwhile, the analysts’ coverage and forecast can transmit information and has significance for the improvement of investors’recognition.The research innovations and contributions are as follows:First, this study further deepens the understanding of the influence of analysts’ behavior on firms. Prior studies center on the analysts behavior and its effectiveness in capital market. Different from prior studies, this study doesn’t investigate the effect of analysts on capital market, but explore the influence of analysts on firms’ behavior. This has significance to further know about the role played by security analysts in China.Second, this study further complement the related literature about the monitor role of analysts. Recently, foreign literature gradually recognize the "monitoring effect" and "pressure effect" that analysts have, and find these two effects both exist in different situation. Although there are some studies have pay attention to these topics in China, it’s still lack of further research. Therefore, it’s worthy question to explore:what the role played by analysts in China? The results in this study suggest that, with the increase of analyst following, the extent of firms’ tax aggressive and real earnings management both decrease, which indicate the "monitoring effect" of analysts in China. Thus, this study can not only indentify the monitor role played by analysts, but also deepen the understanding the functions of analysts and confirm the analysts as one mechanism of the external supervision.Third, this study deepen the understanding about the interaction between firms and analysts. Prior studies usually investigate the influence of analysts on firms. In fact, both the "governance" signal and improvement of investor recognition (Merton,1987) induced by analysts following indicate that firms need analyst to follow them. Some papers find that firms will actively purchase research report or hire the expert of investor relation to attract investors’ coverage (Kirk,2011; Bushee and Miller,2012). However, due to the limitation of data or appropriate research setting, there is few paper to investigate this question in China. By using the2008WenChuan earthquake as an exogenous event, this study explores the behavior of firms that completely lose analyst coverage and its consequence. The results suggest that, analyst coverage can transmit information between firms and investors, and also have significance for improving the extent of investors’ recognition. Thus, the firms completely lose analyst coverage will increase the probability of analyst coverage through donation. From the aspects of firms, this part can help to further understand the firms’ strategic behavior and the important role of analysts for investor relation management.