Ultimate ownership and analyst following

This study investigates how the ultimate ownership structure characterized by a large discrepancy between controlling owners' control rights and cash flow rights affects the extent of analyst following, and whether the effect varies with a number of legal and extra-legal institutions. Using a comprehensive, firm-level ownership data set for 8 East Asian and 13 Western European countries, I find that analyst coverage is positively related to the divergence between ultimate owners' cash flow rights and control rights after controlling for the concentration of control and other standard determinants for analyst coverage. This positive association is robust across both annual and pooled samples. Moreover, the positive relation is significantly reduced in countries with a higher level of legal protection and effective extra-legal institutions, and is significantly more pronounced when insider expropriation can be more easily executed. These findings suggest that firms with a large separation between cash flow rights and control rights are more likely to attract intensive analyst coverage, probably because minority shareholders demand more information when the risk of insider expropriation is high, and rely more on the scrutiny afforded by financial analysts. This pattern of relation is less pronounced for divergent firms when outside investors are well protected by legal and extra-legal systems, consistent with the notion that the private control benefits and agency costs are significantly limited in such an environment. One interpretation of these results is that financial analysts may play an important monitoring role where external governance mechanisms are weak.