Description
The purpose of this paper is to examine the association of analyst following with the
strength of overall firm-specific corporate governance (CG) in an emerging-market setting.
Design/methodology/approach – This paper uses empirical methodology to test the h
Accounting Research Journal
Analyst following and corporate governance: emerging-market evidence
Minna Yu
Article information:
To cite this document:
Minna Yu, (2010),"Analyst following and corporate governance: emerging-market evidence", Accounting
Research J ournal, Vol. 23 Iss 1 pp. 69 - 93
Permanent link to this document:
http://dx.doi.org/10.1108/10309611011060533
Downloaded on: 24 January 2016, At: 21:10 (PT)
References: this document contains references to 56 other documents.
To copy this document: [email protected]
The fulltext of this document has been downloaded 874 times since 2010*
Users who downloaded this article also downloaded:
Rakesh Gupta, Thadavillil J ithendranathan, (2012),"Fund flows and past performance in
Australian managed funds", Accounting Research J ournal, Vol. 25 Iss 2 pp. 131-157 http://
dx.doi.org/10.1108/10309611211287314
Raghavan J . Iyengar, J udy Land, Ernest M. Zampelli, (2010),"Does board governance improve
the quality of accounting earnings?", Accounting Research J ournal, Vol. 23 Iss 1 pp. 49-68 http://
dx.doi.org/10.1108/10309611011060524
Katherine Uylangco, Steve Easton, Robert Faff, (2010),"The equity and efficiency of the Australian share
market with respect to director trading", Accounting Research J ournal, Vol. 23 Iss 1 pp. 5-19 http://
dx.doi.org/10.1108/10309611011060506
Access to this document was granted through an Emerald subscription provided by emerald-srm:115632 []
For Authors
If you would like to write for this, or any other Emerald publication, then please use our Emerald for
Authors service information about how to choose which publication to write for and submission guidelines
are available for all. Please visit www.emeraldinsight.com/authors for more information.
About Emerald www.emeraldinsight.com
Emerald is a global publisher linking research and practice to the benefit of society. The company
manages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as well as
providing an extensive range of online products and additional customer resources and services.
Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee
on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive
preservation.
*Related content and download information correct at time of download.
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
Analyst following and corporate
governance: emerging-market
evidence
Minna Yu
Monmouth University, West Long Branch, New Jersey, USA
Abstract
Purpose – The purpose of this paper is to examine the association of analyst following with the
strength of overall ?rm-speci?c corporate governance (CG) in an emerging-market setting.
Design/methodology/approach – This paper uses empirical methodology to test the hypothesis
with a sample of 753 emerging-market companies over 2001 and 2002.
Findings – It is found that the effectiveness of CG has a positive impact on the level of analyst
following. Further analyses indicate that this positive relation is concentrated in the countries with a
common law tradition.
Research limitations/implications – This paper joins prior research by providing evidence on the
information intermediary role of ?nancial analysts. It also provides supporting evidence on analysts’
monitoring role in common law countries of emerging markets.
Practical implications – The ?ndings of this paper have implications for the decision making of
managers and investors. By improving CG at the ?rm level, companies can signi?cantly improve their
information environments. The ?ndings of this paper also have important implications for standard
setters and regulators in emerging economies by shedding light on the importance of requesting ?rms
to have good CG mechanisms in place, particularly in countries with relatively strong investor
protection.
Originality/value – Although prior research has documented the positive effect of country-level
investor protection or a single aspect of ?rm-level CG on analyst following, it is unknown whether the
level of analyst following is associated with the quality of ?rm-speci?c CG. This paper ?lls in this
research gap by empirically investigating this relation.
Keywords Financial analysis, Corporate governance, Emerging markets
Paper type Research paper
1. Introduction
This paper examines the association between the number of analysts following a
company and the strength of ?rm-level corporate governance (CG) in the emerging-
market context. Prior research uses the number of analysts following a company
(analyst following hereafter)[1] to indicate the amount of private information acquired
by ?nancial analysts and considers ?nancial analyst information a major component of
a ?rm’s information environment (Gleason and Lee, 2003; Bushman et al., 2004). The
market assimilates earnings news more quickly and completely when companies are
followed by a large number of analysts (Gleason and Lee, 2003). Also, companies
followed by a large number of analysts tend to have higher market liquidity (Roulstone,
2003), lower cost of equity (Bowen et al., 2008), less default risk (Cheng and
Subramanyam, 2008), and higher valuation (Lang et al., 2003). Given the positive impact
of a high level of analyst following on pricing ef?ciency, it is important to know what
?rm characteristics in?uence the decision of analysts to follow particular companies.
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1030-9616.htm
Analyst
following
69
Accounting Research Journal
Vol. 23 No. 1, 2010
pp. 69-93
qEmerald Group Publishing Limited
1030-9616
DOI 10.1108/10309611011060533
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
CG generally refers to a set of mechanisms through which outside investors protect
themselves against expropriation by insiders (La Porta et al., 2000). Additionally, CG is
the set of mechanisms that in?uence the decisions made by managers when there is
separation of ownership and control (Larcker et al., 2007, p. 964)[2]. In recent years,
investors of companies with weak CG practices have sustained billions of dollars of
losses (Institutional Shareholder Services, 2005). The stock price collapse of Adelphia,
Enron, and WorldCom were largely due to poor governance (Brown and Caylor, 2006).
The quality of CG therefore has been used as a key criterion for investment decisions.
Prior research has documented that ?rms in emerging markets that follow
recommended CG practices tends to have a lower cost of equity (Chen et al., 2009),
greater liquidity (Chen et al., 2005), and a higher market valuation (Klapper and Love,
2004; Durnev and Kim, 2005). A ?rm’s good CG is re?ected in its stock price through a
number of channels, one of which is the information intermediation by ?nancial
analysts[3]. Given the positive association between high analyst following and pricing
ef?ciency, it is important to examine whether analysts prefer to follow ?rms with
good CG. A high level of analyst following will consequently help the market to
ef?ciently incorporate the differences in CG across ?rms.
Prior research has documented a positive association between analyst following
and country-level investor protection (Chang et al., 2000) as well as between analyst
following and individual ?rm-level CG mechanisms (Hope, 2003; Lang et al., 2004;
Ali et al., 2007). However, little is known about whether the overall ?rm-level CG
in?uences the level of analyst following. The current paper adds to our knowledge on
how analyst following is associated with the quality of ?rm-speci?c CG by using a CG
ranking of emerging market companies to assess the strength of CG.
The ?rst hypothesis of this paper is that:
H1. The number of analysts following the company is positively related to the
quality of CG in emerging markets.
Companies with effective governance mechanisms provide more reliable earnings
information and more disclosures (Ho and Wong, 2001), costing analysts less time and
resources to research a company and also improving analysts’ forecast performance
(Byard et al., 2006). The lower cost and higher forecast accuracy will in turn motivate
analysts to provide earnings forecasts for such companies. Indeed, prior research has
documented the positive relation between analyst following and the extent of ?rm
disclosures (Lang and Landholm, 1996; Ali et al., 2005). In addition to ?rm disclosures,
effective CG mechanisms discipline managers to work in the interest of investors,
which results in future pro?tability in emerging markets (Klapper and Love, 2004;
Durnev and Kim, 2005). Research has shown that analysts prefer to follow ?rms with
less agency problems and more investment potential (McNichols and O’Brien, 1997;
Hope, 2003; Lang et al., 2004; Ali et al., 2007). Therefore, analysts are more likely to
follow ?rms with effective CG mechanisms.
The results obtained with 753 companies from 26 emerging economies show that
the aggregate CG ranking, calculated as the average of seven individual governance
scores, has a positive relation to analyst following. Further analysis reveals that
analyst following is incrementally associated with CG practices that are not related to
disclosure. Taken together, the results support the view that analysts prefer to provide
earnings forecasts for better-governed ?rms not only because of their better disclosures
ARJ
23,1
70
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
but also because of the governance characteristics that relate to the independence,
responsibility and fairness of the board and management.
The second hypothesis of this paper is that:
H2. The positive relation between analyst following and the quality of CG is
stronger in common law countries.
La Porta et al. (1997, 1998, 2000, 2002) classify countries into common and code law
countries based on their legal origins and argue that this legal origin approach is a
fruitful way to understand ?rm-speci?c CG. As argued by Ball et al. (2000), the CG in
code law countries features agents representing large shareholders. Information
asymmetry is moderated primarily through insider communication. As a consequence,
managers are closely monitored. In contrast, companies in common law countries have
diversi?ed investors. Therefore, in common law countries, good CG at the ?rm level is
critical to ensure good management, which in turn, leads to high-quality disclosures as
well as superior operating performance. In addition, prior research has documented
that analysts have more incentives to provide earnings forecasts and perform better,
and also analysts’ forecasts are more value relevant in common law countries than in
code law countries (Fulkerson and Meek, 1998; Chang et al., 2000; Barniv et al., 2005).
As such, it is expected that analysts are more likely to carefully select companies to follow
in common lawcountries. That is, they will look into the companies’ CGmechanisms and
evaluate them in making their coverage decisions.
To test the H2, the sample is divided into two subsamples: companies in common
law countries and companies in code law countries. There are 426 ?rm-year
observations from eight common law countries and 327 ?rm-year observations from
18 code law countries. As predicted, the positive impact of CG on analyst following can
only be traced to countries with a common law origin. The evidence supports this
conjecture that better CG leads to a higher level of analyst following in common law
countries but not in code law countries within the emerging markets.
This paper contributes to the extant literature in two ways. First, it advances our
understanding of the association between analyst following and CG by documenting
that the quality of ?rm-level CG is a determinant of analyst following. Recent research
has concentrated on how the country-level investor protection (Chang et al., 2000) or a
single aspect of ?rm-level CG (Hope, 2003; Lang et al., 2004; Ali et al., 2007) in?uences
analyst following. The current paper uses both composite and disaggregated measures
of CG quality. The positive association between analyst following and the strength of
?rm-speci?c CG suggests that the greater information distribution by ?nancial
analysts is a channel through which better-governed companies are rewarded by the
market[4].
Second, the results from the common law versus code law partition suggest that the
positive relation between analyst following and ?rm-speci?c CG is traced to common
law countries, characterized as providing strong investor protection. That is, ?rm-level
CG is a factor that ?nancial analysts consider in making coverage decisions only in
countries with relatively strong investor protection. These ?ndings are in line with
prior studies that analysts have more incentives to play an active role in common law
countries (Fulkerson and Meek, 1998; Chang et al., 2000; Barniv et al., 2005).
The ?ndings of this study have implications for managers and investors by
demonstrating that companies with strong CG mechanisms enjoy better information
Analyst
following
71
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
environments, as evidenced by the greater analyst following. Furthermore, the ?ndings
in regard to what aspects of CG are particularly important in determining analysts’
willingness to follow a company inform companies about the relative signi?cance of
certain CG mechanisms. For standard setters and regulators in emerging economies,
this paper suggests the importance of requiring companies to establish and maintain
good CG mechanisms, particularly in countries with stronger investor protection.
The rest of the paper proceeds as follows. Section 2 reviews related literature. The
hypotheses tested are developed in Section 3. Section 4 describes the models used to
test the hypotheses. Section 5 summarizes data and sample. Section 6 presents results
and Section 7 concludes the paper.
2. Prior literature
Prior empirical research has documented the bene?ts of having a high level of analyst
following. Lang et al. (2003) ?nd that companies with a higher level of analyst following
enjoy higher valuations. Roulstone (2003) documents a positive impact of analyst
following on market liquidity measured by bid-ask spreads and depths. Bowen et al.
(2008) ?nd that a higher level of analyst following is associated with less underpricing of
seasoned equity offerings, which suggests lower cost of equity for heavily followed
?rms. Cheng and Subramanyam (2008) document that the default risk, as proxied by
credit rating, is lower when a company is followed by a large number of analysts.
Given the advantages of having a high level of analyst following, it is important to
know what factors in?uence analysts’ coverage decisions. Empirical research generally
uses the level of analyst following to proxy for analysts’ incentives to evaluate ?rms.
Bhushan (1989) identi?es ?rm size as a determinant of analyst following and ?nds that
analysts follow large ?rms. McNichols and O’Brien (1997) argue that analysts’ effort
allocation depends on their expectations of the company’s future performance.
Speci?cally, analysts choose to report earnings forecasts only when they hold favorable
views about the future performance of the stock. They provide evidence that analysts’
stock recommendations are more optimistic and return on equity is higher for added
stocks than those they previously covered. On the contrary, analysts’ stock
recommendations are more pessimistic and return on equity is lower for discontinued
stocks compared with those stocks they continue to follow. Barth et al. (2001) document
that analysts like to follow ?rms with more intangible assets, consistent with the view
that analysts have more incentives to follow mispriced ?rms.
Prior research also establishes a positive association between analyst following and
the level of disclosure. In the USA, Lang and Lundholm (1996) ?nd that analysts tend
to follow companies with more disclosures. Ali et al. (2005) corroborate this ?nding
using industry concentration as a proxy for disclosure. Eng and Teo (2000) document a
positive relation between analyst following and the level of annual report disclosures in
Singapore. Using a sample of companies from 40 countries, Hope (2003) ?nds analyst
following to be positively associated with the extent of note disclosures[5]. Lang et al.
(2003) reveal that analysts are more likely to follow companies cross-listed on US
exchanges than those not cross-listed, consistent with analysts bene?ting from the
superior information environment of cross-listed companies. Bushman et al. (2005) ?nd
that analysts are more likely to follow a company in countries where insider trading is
hampered and they also found that increase in analyst following upon the restriction of
insider trading is more pronounced in emerging market economies.
ARJ
23,1
72
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
A number of studies provide international evidence on the association between
analyst following and the strength of CG. Chang et al. (2000) ?nd that the level of
analyst following is generally higher in common law countries. Hope (2003) predicts
and documents that analysts are less likely to follow companies with concentrated
ownership. Lang et al. (2004) ?nd that analyst following is lower for companies with
potential incentives to hold or manipulate information, such as when the family/
management group holds the largest controlling interest. They interpret this ?nding as
CG playing an important role in analysts’ willingness to follow companies. Ali et al.
(2007) provide evidence that compared with non-family ?rms, family ?rms enjoy
greater analyst following, consistent with family ?rms attracting analysts because of
lower overall agency costs[6]. Hope (2003), Lang et al. (2004) and Ali et al. (2007) all use
ownership structure as a proxy for the strength of CG. However, ownership structure is
only one aspect of CG. The current paper uses a comprehensive measure of the extent
to which a company has adopted best practices in CG.
Prior research in emerging market economies generally suggests that ?rms with
strong CG mechanisms are highly valued. Bai et al. (2004) ?nd a positive effect of
governance mechanisms on market valuation in China. Black et al. (2006) and Choi et al.
(2007) document that an overall CG index is positively related to market value in
Korea. Kouwenberg (2006) ?nd the positive valuation effect of CG in Thailand. These
studies examine individual governance characteristics in single countries. Using the
Credit Lyonnais Securities Asia (CLSA) ranking as the measure of the overall CGquality,
Klapper and Love (2004) and Durnev and Kim (2005) document that better CG
is associated with higher operating performance and higher Tobin’s Q, which is a proxy
for market valuation. Chen et al. (2009) ?nd that the score on the CGmechanisms provided
by CLSA is negatively associated with the cost of equity capital. Chen et al. (2005)
document that the CLSAscore is positively related to market liquidity. The current paper
differs from this stream of research by studying whether establishing good CG
mechanisms is associated with improvement in ?rms’ information environments.
3. Research hypotheses
Analyst following can be explained by the quality of CG in emerging economies for at
least two reasons. First, Shen and Chih (2007) ?nd that a company with good
CG mechanisms is less likely to conduct earnings management, thereby giving
?nancial analysts more reliable information to work with in assessing the company’s
investment potential. In addition, companies with effective CG mechanisms tend to
disclose more high-quality information (Ho and Wong, 2001; Fan and Wong, 2002;
Eng and Mak, 2003; Peasnell et al., 2005; Willekens et al., 2005). The high-quality
information provided by the ?rm also improves the predictability of earnings.
In support of this conjecture, Byard et al. (2006) document that analyst forecast
accuracy is positively related to the quality of CG. Xu and Tang (2008) ?nd lower
analyst forecast accuracy when ?rms’ internal control is weak. The availability and
high quality of the ?rm-disclosed information lowers an analyst’s costs of providing
earnings forecasts and improves the forecast accuracy, which give analysts more
incentives to follow the company.
Second, as information intermediaries, analysts collect information to assess
the economic viability and investment potential of a company (Lang et al., 2004).
McNichols and O’Brien (1997) argue that analysts’ effort allocation depends on their
Analyst
following
73
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
expectations of the company’s future performance. Speci?cally, analysts choose to
report earnings forecasts only when they hold favorable views about the future
performance of the stock. With a global sample, Hope (2003) argues that analyst value
the potential for future revenues and supports this argument with evidence that analyst
following is greater in environments with active initial public offering markets. Hope
(2003) also predicts and ?nds that ?rms with concentrated ownership have lower
analyst following. Lang et al. (2004) document a negative relation between analyst
following and the level of ownership concentration, consistent with that analysts are
reluctant to provide earnings forecasts for ?rms with less effective managerial control.
Ali et al. (2007) also document that family companies, which have less severe overall
agency problems compared with non-family ?rms, tend to be followed by more
analysts.
In a company with good CG mechanisms, stockholders have superior ability to
directly monitor managers and therefore the company faces less severe agency
problems from separation of ownership. Managers are more motivated to work in the
interest of investors, which leads to future pro?tability. Consistent with this view,
Klapper and Love (2004) document a positive relation between the strength of CG and
operating performance in emerging markets. Since good CG is associated with better
management and better future economic viability, analysts have greater incentives to
follow a better-governed ?rm.
This paper studies whether CG affects analyst following in an emerging market
setting because of the signi?cance of ?rm-level CG to emerging market companies in
which the agency costs are relatively high. Prior research in developed countries has
either found that ?rm-speci?c CG has no economically signi?cant effect on market
value or has documented mixed results (Gompers et al., 2003; Klein et al., 2005; Gupta
et al., 2005; Brown and Caylor, 2006; Larcker et al., 2007). Black (2001) attributes the
mixed results to the legal system, stock exchange rules, and behavioral norms in
developed countries, which ensure that a majority of companies have adopted a certain
level of CG. In other words, there is little variance in ?rm-level governance practices
among companies in developed countries. By contrast, companies in emerging markets
establish CG mechanisms at signi?cantly different levels where favorable economic
consequences of good CG have been documented (Klapper and Love, 2004; Chen et al.,
2005, 2009; Durnev and Kim, 2005).
The observed positive association between CG and performance in emerging
markets is because that, compared with developed countries, these emerging-market
countries have higher agency costs resulting from weaker investor protection and
greater uncertainty in the capital markets. Subsequently, CG is more important for
these countries and hence analysts place greater importance on the CG practices of
?rms in emerging markets. The hypothesis in an alternative form is:
H1. In emerging markets, analyst following is positively associated with the
quality of CG practices.
This paper further examines whether the legal origins of the countries where companies
are domiciled in affect the relation between analyst following and the quality of CG.
In this paper, a stronger relation between analyst following and CG is expected in
common law countries. La Porta et al. (1998) argue that the legal approach is a fruitful
way to understand CG. Ball et al. (2000) establish that companies in code law countries
ARJ
23,1
74
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
adopt a stakeholder model of CG. That is, the board of directors is represented by elected
agents for interested parties including banks, government, major customers and
suppliers, and even employees, who hold large blocks and can effectively monitor
managers. Implementing good CG is not critical to a company’s success as the agency
problemis easily solved through the communications between these related parties and
managers without CGmechanisms (La Porta et al., 1998; Ball et al., 2000). By contrast, in
the shareholder CGmodel of common lawcountries, board members do not usually hold
large blocks of shares and monitoring managers is largely through the capital market.
It follows that CG mechanisms are particularly important to discipline management in
common law countries but not code law countries. In line with this conjecture, Mitton
(2004) ?nds that ?rms with stronger CG issue more dividends in common lawcountries
of emerging markets. However, the dividend payouts are not in?uenced by the
effectiveness of CG in code law countries.
The relation between analyst following and CG is strengthened in common law
countries also because analysts are motivated to a greater extent and therefore play a
more active role as information intermediaries in common law countries. That is, the
primary method of ?nancing in common law countries is through external equity
market, giving rise to high demand for disclosures and analyst service. Analysts, in turn,
respond to investors’ demand by providing high quality earnings forecasts. Fulkerson
and Meek (1998) ?nd that the earnings forecasts by analysts pre-empt the information
content of the US GAAP reconciliation information in common law countries but not
in code law countries[7]. Chang et al. (2000) document higher forecast accuracy, less
forecast dispersion and higher analyst following for companies in common law
countries. Barniv et al. (2005) predict and ?nd that analysts with superior ability and
resources are more likely to outperformtheir peers in common lawcountries than in code
lawcountries. Given the role analysts play in the common lawcountries, analysts should
choose the ?rms to cover in a more effective way. Therefore, they will more likely
consider the quality of CG in their coverage decisions. Based on the above arguments,
the second hypothesis is:
H2. In emerging markets, the positive relation between analyst following and CG
is more pronounced in common law than in code law countries.
4. Research models
The following model modi?ed from Lang et al. (2004) is employed to test H1:
FOLLOWING
it
¼ a
0
þ a
1
CG
it
þ a
2
SIZE
it
þ a
3
XLIST
it
þ a
4
EARNINGS_GROWTH
it
þ a
5
RETURN_STD
it
þ a
6
RE_CORR
it
þ a
7
EARNINGS_SUR
it
þ error
it
ð1Þ
where subscript i indicates the ?rm and t indicates the year:
FOLLOWING ¼ the number of analysts who issued annual earnings
forecasts in I/B/E/S in 2001 or 2002 averaged over a
12-month period[8].
CG ¼ the measure of corporate governance mechanisms,
calculated as the mean of all seven dimensions of CG
reported by CLSA.
Analyst
following
75
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
SIZE ¼ the log of total assets.
XLIST ¼ 1 if the ?rm has an ADR traded in the USA that requires
reconciliation to US GAAP reporting standards.
EARNINGS_GROWTH ¼ the average growth in earnings over the preceding three
years.
RETURN_STD ¼ the standard deviation of returns over the preceding
three years.
RE_CORR ¼ the correlation between annual returns and earnings
over the preceding three years;
EARNINGS_SUR ¼ the absolute value of the difference between
current-year EPS and prior-year EPS de?ated by price.
The aggregate CG ranking published by CLSA is utilized to measure the strength of
CG mechanisms (See the Appendix). Analyst following (FOLLOWING) is de?ned as
the average number of analysts who issued annual earnings forecasts in I/B/E/S
International ?les. Since CLSA rankings were published in April 2001 and February
2002, the average number of analysts following a company is used over the period from
April 2001 to January 2002 (from February 2002 to January 2003) for the rankings
published in April 2001 (February 2002). The individual forecasts in the eleventh
month of the ?scal year-end to count the number of analysts following a company is
alternatively used as O’Brien and Bhushan (1990) suggest that analyst following levels
off in this month. The results are qualitatively unchanged.
Following Lang et al. (2004), six ?rm-level control variables are added in the analyst
following model. SIZE is the log value of total assets (in million US$). Lang et al. (2003)
?nd that non-US ?rms that cross-list in the USA enjoy greater analyst coverage than
?rms that are not cross-listed. Therefore, a dummy variable (XLIST) is added that
equals 1 if the company has an ADRtraded in the USAthat requires reconciliation to US
GAAP reporting standards and 0 otherwise. Consistent with Lang et al. (2003, 2004),
a positive sign on both SIZE and XLIST is expected. Four other control variables are
included following Lang and Lundholm (1996) and Lang et al. (2004): earnings growth
(EARNINGS_GROWTH), return-earnings correlation (RE_CORR), the standard
deviation of returns (RETURN_STD), and earnings surprise (EARNINGS_SUR).
Consistent with these two studies, EARNINGS_GROWTH and RE_CORR are expected
to be positive and RETURN_STD and EARNINGS_SUR are expected to be negative.
Industry and country dummy variables are included to control for the ?xed effects.
In addition, two dummy variables are included to control for the year effect. The ?rst
dummy variable is 1 if a company has CLSA rankings for both 2001 and 2002 and 0
otherwise. The second dummy variable is 1 if CLSArankings published in 2001 are used
and 0 if CLSA rankings published in 2002 are used[9].
Next, the model is rerun by replacing the overall score of CG with each of the seven
individual scores pertaining to different aspects of CG. “Transparency” (TRAN) is
the ability of outsiders to assess the true position of a company. “Discipline” (DSPL)
is management’s commitment to shareholder value and ?nancial discipline.
“Independence” (INDP) is the board of directors’ independence from controlling
shareholders and senior management. “Accountability” (ACCT) is the accountability of
ARJ
23,1
76
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
management to the board of directors. “Responsibility” (RESP) is the effectiveness of the
board in taking necessary measures in case of mismanagement. “Fairness” (FAIR) is the
treatment minority shareholders receive from majority shareholders and management.
“Social awareness” (SOCL) is the company’s emphasis on ethical and socially
responsible behavior. The model is as follows:
FOLLOWING
it
¼ b
0
þ b
1
CG
it
þ b
2
DSPL
it
þ b
3
INDP
it
þ b
4
ACCT
it
þ b
5
RESP
it
þ b
6
FAIR
it
þ b
7
SOCL
it
þ b
8
SIZE
it
þ b
9
XLIST
it
þ b
10
EARNINGS_GROWTH
it
þ b
11
RETURN_STD
it
þ b
12
RE_CORR
it
þ b
13
EARNINGS_SUR
it
þ error
it
ð2Þ
5. Sample and data
The CG rankings provided by the CLSA survey are employed to measure the overall
CG quality in emerging markets. As mentioned in the previous section, seven aspects
of CG mechanisms are considered in this survey. Prior research has tested the validity
of CLSA as a proxy for the effectiveness of CG. For example, Khanna et al. (2006) ?nd
that Indian companies with low CLSA scores do have more instances of minority
shareholder expropriation and other kinds of CG problems reported on the media.
Durnev and Kim (2005) provide the same results with the scandal index in
84 companies from 14 countries. Prior studies that adopt CLSA as a measure of the
CG effectiveness include Klapper and Love (2004), Bushman et al. (2004), Chen et al.
(2005), Ali et al. (2007) and Chen et al. (2009).
The sample selection procedure is provided in Panel A of Table I. It begins with the
491 and 498 companies surveyed by CLSA in 2001 and 2002 from 25 emerging markets
in Asia, Latin America, Eastern Europe, the Middle East and Africa (EEMEA)[10]. The
number of analyst following is obtained from Institutional Brokers’ Estimate System
(I/B/E/S) International Summary and Detail ?les. Because of missing data in I/B/E/S,
117 observations were deleted. Financial statement data used to calculate control
variables are gathered from Global Vantage. XLIST is collected from the Bank of
New York Global Equity Investing Depository Receipt Service list. Owing to missing
data in these two sources, another 119 observations are removed from the sample.
The ?nal sample is composed of 753 ?rm-year observations over 2001 and 2002.
In Panel B, the sample is decomposed according to legal traditions and countries.
There are 426 and 327 observations in the common law (eight countries) and code law
partitions (18 countries), respectively. The average number of analyst following is 5.02
for common law countries and 4.30 for code law countries. Consistent with Chang et al.
(2000), the average number of analysts following a company is greater when the
country’s legal protection is stronger. Companies in common law countries also
demonstrate stronger CG than companies in code law countries: the average CG
ranking score is 61.61 for common law countries and 52.79 for code law countries.
Panel Aof Table II provides descriptive statistics for the whole sample. The average
number of analysts following a company is 4.66. The company with the largest analyst
following is covered by 16 analysts and the company with the smallest analyst following
is covered by 1 analyst. The mean of CLSA CG rankings is 56.97 with a standard
deviation of 13.92. These rankings range from 10.5 to 93.5, with a median of 58.60.
The median of XLIST is 0, indicating that more than half of the companies are listed in
the US stock markets.
Analyst
following
77
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
Panel B of Table II reports the descriptive statistics for common law and code law
subsamples. Comparing the means of the variables reveals the following. First, although
analyst following is larger in common law countries (difference ¼ 0.72), the difference
across the two subsamples is only signi?cant at the 0.10 level (t-statistic ¼ 1.37). Second,
the overall quality of CGis signi?cant higher in common lawcountries (difference ¼ 8.82,
t-statistic ¼ 5.83). So are all seven individual CG dimensions. Third, EARNINGS_-
GROWTH, RETRUN_STD, RE_CORR are not signi?cantly different between the two
subsamples. However, the differences in the other three control variables (i.e. SIZE,
XLIST, and EARNINGS_SUR) are signi?cant. On average, companies from code law
countries are larger thanthose fromcommon lawcountries. The percentage of cross-listed
Panel A: sample selection
No. of observations
Initial sample: 999
Less: missing data in I/B/E/S (127)
Equals: 872
Less: missing data in Worldscope (119)
Final sample: 753
Panel B: sample breakdown by legal origin and country
No. of companies
Average no. of
analyst following Average CG score
Common law countries
Hong Kong 92 7.23 61.30
India 125 3.56 59.36
Israel 3 1.29 39.40
Malaysia 81 6.41 61.34
Pakistan 8 1.06 34.06
Singapore 74 6.04 63.24
South Africa 50 3.23 71.07
Sri Lanka 1 3.63 50.55
Total (average) 426 (5.02) (61.61)
Code law countries
Argentina 6 2.93 62.85
Brazil 60 5.01 60.18
Bulgaria 1 4.00 15.40
Chile 20 2.32 62.51
China 36 5.93 46.44
Colombia 2 1.00 54.65
Czech Republic 4 1.76 39.30
Greece 2 6.19 57.15
Hungary 3 3.14 43.23
Indonesia 29 4.25 38.10
Korea 24 2.83 58.80
Mexico 15 4.17 62.51
Peru 2 3.1 73.50
Philippine 32 3.90 45.21
Poland 8 2.56 37.96
Taiwan 72 4.40 57.32
Turkey 23 2.98 42.04
Venezuela 1 3.57 67.10
Total (average) 327 (4.30) (52.79)
Table I.
Sample selection and
descriptive statistics
ARJ
23,1
78
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
P
a
n
e
l
A
:
w
h
o
l
e
s
a
m
p
l
e
V
a
r
i
a
b
l
e
s
M
e
a
n
S
D
M
i
n
.
M
e
d
i
a
n
M
a
x
.
F
O
L
L
O
W
I
N
G
4
.
6
6
2
.
6
9
1
4
.
3
3
1
6
T
R
A
N
6
1
.
2
7
1
9
.
3
5
0
6
0
1
0
0
D
S
P
L
5
2
.
9
2
2
0
.
5
4
0
5
5
.
6
0
1
0
0
I
N
D
P
5
7
.
8
3
2
7
.
1
2
0
7
1
.
4
0
1
0
0
A
C
C
T
4
9
.
1
1
2
2
.
0
4
0
5
0
.
0
0
1
0
0
R
E
S
P
5
1
.
5
9
2
1
.
8
3
0
5
0
.
0
0
1
0
0
F
A
I
R
6
4
.
9
6
2
7
.
2
0
0
7
7
.
8
0
1
0
0
S
O
C
L
6
9
.
8
4
2
1
.
7
6
0
6
6
.
7
0
1
0
0
C
G
5
6
.
9
7
1
3
.
9
2
1
0
.
5
5
8
.
6
0
9
3
.
5
S
I
Z
E
1
0
.
4
2
2
.
7
5
4
.
1
1
9
.
8
9
8
0
.
4
8
X
L
I
S
T
0
.
3
1
0
.
4
6
0
0
1
E
A
R
N
I
N
G
S
_
G
R
O
W
T
H
2
1
.
7
6
3
.
7
7
2
6
.
5
3
2
1
.
5
6
8
.
6
0
R
E
T
U
R
N
_
S
T
D
2
.
8
6
3
.
3
0
0
.
1
5
1
.
5
1
1
3
.
7
2
R
E
_
C
O
R
R
2
0
.
0
4
0
.
7
0
2
1
2
0
.
0
1
1
E
A
R
N
I
N
G
S
_
S
U
R
2
1
.
5
1
1
2
.
4
0
2
1
6
.
6
2
0
.
5
8
3
8
.
2
8
P
a
n
e
l
B
:
c
o
m
m
o
n
l
a
w
a
n
d
c
o
d
e
l
a
w
s
u
b
s
a
m
p
l
e
s
C
o
m
m
o
n
l
a
w
s
u
b
s
a
m
p
l
e
C
o
d
e
l
a
w
s
u
b
s
a
m
p
l
e
V
a
r
i
a
b
l
e
s
M
e
a
n
S
D
M
i
n
.
M
e
d
i
a
n
M
a
x
.
M
e
a
n
S
D
M
i
n
.
M
e
d
i
a
n
M
a
x
.
t
-
t
e
s
t
F
O
L
L
O
W
I
N
G
5
.
0
2
4
.
3
6
1
4
2
5
4
.
3
0
3
.
2
8
1
4
1
5
0
.
7
2
(
1
.
3
7
)
*
T
R
A
N
6
1
.
3
7
1
6
.
6
9
1
0
6
0
1
0
0
5
4
.
0
9
1
2
.
5
5
1
3
.
9
5
4
.
4
9
0
.
4
7
.
2
8
(
1
.
4
7
)
*
D
S
P
L
5
6
.
8
6
2
1
.
2
8
0
5
5
.
6
1
0
0
4
9
.
3
9
1
9
.
8
4
1
1
.
1
4
4
.
4
1
0
0
7
.
4
7
(
3
.
7
4
)
*
*
*
(
c
o
n
t
i
n
u
e
d
)
Table II.
Descriptive statistics
Analyst
following
79
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
I
N
D
P
6
4
.
1
3
2
6
.
5
4
7
.
1
7
1
.
4
1
0
0
5
3
.
4
3
2
5
.
1
4
7
.
1
6
2
.
5
1
0
0
1
0
.
7
*
*
*
(
4
.
2
6
)
A
C
C
T
4
8
.
5
9
2
0
.
8
1
0
5
0
1
0
0
4
5
.
4
3
2
3
.
1
9
0
5
0
1
0
0
3
.
1
6
(
1
.
4
8
)
*
R
E
S
P
5
6
.
0
3
1
9
.
1
6
0
5
0
1
0
0
4
6
.
2
1
1
9
.
7
1
0
5
0
1
0
0
9
.
8
2
(
5
.
2
1
)
*
*
*
F
A
I
R
7
5
.
3
8
2
3
.
5
4
1
1
.
1
8
3
.
3
1
0
0
5
7
.
2
7
2
5
.
9
3
0
6
0
1
0
0
1
8
.
1
1
(
7
.
5
4
)
*
*
*
S
O
C
L
7
0
.
2
0
2
1
.
8
2
1
1
.
1
6
6
.
7
1
0
0
6
7
.
2
2
2
3
.
2
5
0
6
6
.
7
1
0
0
2
.
9
8
(
1
.
3
6
)
*
C
G
6
1
.
6
1
1
3
.
0
7
1
8
.
9
6
3
.
2
5
9
1
.
4
5
2
.
7
9
1
2
.
5
5
1
3
.
9
5
4
.
4
9
0
.
4
8
.
8
2
(
5
.
8
3
)
*
*
*
S
I
Z
E
8
.
8
7
1
.
7
1
4
.
8
5
8
.
7
5
1
3
.
1
0
1
1
.
2
5
2
.
5
9
6
.
4
7
1
0
.
7
9
1
7
.
5
7
2
2
.
3
8
(
2
1
1
.
1
7
)
*
*
*
X
L
I
S
T
0
.
3
0
0
.
4
6
0
0
1
0
.
3
9
0
.
4
9
0
0
1
2
0
.
0
9
(
2
2
.
0
5
)
*
*
*
E
A
R
N
I
N
G
S
_
G
R
O
W
T
H
2
0
.
1
7
1
0
.
5
3
2
4
5
.
7
6
2
1
.
0
7
9
7
.
3
9
2
1
1
.
5
0
9
4
.
7
5
2
1
,
1
4
3
.
5
2
2
0
.
6
8
4
6
.
3
3
1
1
.
3
3
(
1
.
5
7
)
*
R
E
T
U
R
N
_
S
T
D
4
.
5
8
1
6
.
9
7
0
.
1
5
1
.
4
1
1
5
0
.
4
8
3
.
9
4
6
.
2
6
0
.
2
0
1
.
7
4
4
9
.
4
5
0
.
6
4
(
0
.
4
6
)
R
E
_
C
O
R
R
0
.
0
1
0
.
7
3
2
1
0
.
0
6
1
2
0
.
0
9
0
.
6
7
2
1
2
0
.
0
2
1
0
.
1
(
1
.
2
8
)
E
A
R
N
I
N
G
S
_
S
U
R
1
4
.
2
1
1
1
6
.
0
9
2
6
5
.
4
6
2
0
.
1
8
1
,
0
8
8
.
4
4
2
1
1
.
2
5
1
5
2
.
7
1
2
1
,
9
4
6
.
7
6
0
.
2
5
1
0
4
.
2
8
2
5
.
4
6
(
1
.
7
5
)
*
*
N
o
t
e
s
:
S
i
g
n
i
?
c
a
n
c
e
a
t
:
*
0
.
1
0
,
*
*
0
.
0
5
,
*
*
*
0
.
0
1
l
e
v
e
l
s
,
r
e
s
p
e
c
t
i
v
e
l
y
;
v
a
r
i
a
b
l
e
d
e
?
n
i
t
i
o
n
s
:
F
O
L
L
O
W
I
N
G
i
s
t
h
e
a
v
e
r
a
g
e
n
u
m
b
e
r
o
f
a
n
a
l
y
s
t
s
w
h
o
i
s
s
u
e
d
a
n
n
u
a
l
e
a
r
n
i
n
g
s
f
o
r
e
c
a
s
t
s
i
n
I
/
B
/
E
/
S
i
n
2
0
0
1
o
r
2
0
0
2
;
T
R
A
N
i
s
t
h
e
a
b
i
l
i
t
y
o
f
o
u
t
s
i
d
e
r
s
t
o
a
s
s
e
s
s
t
h
e
t
r
u
e
p
o
s
i
t
i
o
n
o
f
a
c
o
m
p
a
n
y
;
D
S
P
L
i
s
m
a
n
a
g
e
m
e
n
t
’
s
c
o
m
m
i
t
m
e
n
t
t
o
s
h
a
r
e
h
o
l
d
e
r
v
a
l
u
e
a
n
d
?
n
a
n
c
i
a
l
d
i
s
c
i
p
l
i
n
e
;
I
N
D
P
i
s
t
h
e
b
o
a
r
d
o
f
d
i
r
e
c
t
o
r
’
s
i
n
d
e
p
e
n
d
e
n
c
e
f
r
o
m
c
o
n
t
r
o
l
l
i
n
g
s
h
a
r
e
h
o
l
d
e
r
s
a
n
d
s
e
n
i
o
r
m
a
n
a
g
e
m
e
n
t
;
A
C
C
T
i
s
t
h
e
a
c
c
o
u
n
t
a
b
i
l
i
t
y
o
f
m
a
n
a
g
e
m
e
n
t
t
o
t
h
e
b
o
a
r
d
o
f
d
i
r
e
c
t
o
r
s
;
R
E
S
P
i
s
t
h
e
e
f
f
e
c
t
i
v
e
n
e
s
s
o
f
t
h
e
b
o
a
r
d
i
n
t
a
k
i
n
g
n
e
c
e
s
s
a
r
y
m
e
a
s
u
r
e
s
i
n
c
a
s
e
o
f
m
i
s
m
a
n
a
g
e
m
e
n
t
;
F
A
I
R
i
s
t
h
e
t
r
e
a
t
m
e
n
t
m
i
n
o
r
i
t
y
s
h
a
r
e
h
o
l
d
e
r
s
r
e
c
e
i
v
e
f
r
o
m
m
a
j
o
r
i
t
y
s
h
a
r
e
h
o
l
d
e
r
s
a
n
d
m
a
n
a
g
e
m
e
n
t
;
S
O
C
L
i
s
t
h
e
c
o
m
p
a
n
y
’
s
e
m
p
h
a
s
i
s
o
n
e
t
h
i
c
a
l
a
n
d
s
o
c
i
a
l
l
y
r
e
s
p
o
n
s
i
b
l
e
b
e
h
a
v
i
o
r
;
C
G
i
s
t
h
e
s
t
r
e
n
g
t
h
o
f
C
G
m
e
c
h
a
n
i
s
m
s
,
c
a
l
c
u
l
a
t
e
d
a
s
t
h
e
m
e
a
n
o
f
a
l
l
d
i
m
e
n
s
i
o
n
s
i
n
c
l
u
d
i
n
g
T
R
A
N
,
D
S
P
L
,
I
N
D
P
,
A
C
C
T
,
R
E
S
P
,
F
A
I
R
a
n
d
S
O
C
L
;
S
I
Z
E
i
s
t
h
e
l
o
g
v
a
l
u
e
o
f
t
o
t
a
l
a
s
s
e
t
s
;
X
L
I
S
T
i
s
a
n
i
n
d
i
c
a
t
o
r
v
a
r
i
a
b
l
e
t
h
a
t
e
q
u
a
l
s
1
i
f
t
h
e
?
r
m
h
a
s
a
n
A
D
R
t
r
a
d
e
d
i
n
t
h
e
U
S
A
t
h
a
t
r
e
q
u
i
r
e
s
r
e
c
o
n
c
i
l
i
a
t
i
o
n
t
o
U
S
G
A
A
P
r
e
p
o
r
t
i
n
g
s
t
a
n
d
a
r
d
s
;
E
A
R
N
I
N
G
S
_
G
R
O
W
T
H
i
s
t
h
e
a
v
e
r
a
g
e
g
r
o
w
t
h
i
n
e
a
r
n
i
n
g
s
o
v
e
r
t
h
e
p
r
e
c
e
d
i
n
g
t
h
r
e
e
y
e
a
r
s
;
R
E
T
U
R
N
_
S
T
D
i
s
t
h
e
s
t
a
n
d
a
r
d
d
e
v
i
a
t
i
o
n
o
f
r
e
t
u
r
n
s
o
v
e
r
t
h
e
p
r
e
c
e
d
i
n
g
t
h
r
e
e
y
e
a
r
s
;
R
E
_
C
O
R
R
i
s
t
h
e
c
o
r
r
e
l
a
t
i
o
n
b
e
t
w
e
e
n
a
n
n
u
a
l
r
e
t
u
r
n
s
a
n
d
e
a
r
n
i
n
g
s
o
v
e
r
t
h
e
p
r
e
c
e
d
i
n
g
t
h
r
e
e
y
e
a
r
s
;
E
A
R
N
I
N
G
S
_
S
U
R
i
s
t
h
e
a
b
s
o
l
u
t
e
v
a
l
u
e
o
f
t
h
e
d
i
f
f
e
r
e
n
c
e
b
e
t
w
e
e
n
c
u
r
r
e
n
t
-
y
e
a
r
E
P
S
a
n
d
p
r
i
o
r
-
y
e
a
r
E
P
S
d
e
?
a
t
e
d
b
y
p
r
i
c
e
Table II.
ARJ
23,1
80
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
companies is larger in code law countries (39 percent) than in common law countries
(30 percent). EARNINGS_SUR is positive in common law countries and negative in code
law countries. The difference in EARNGS_SUR is 25.46, signi?cant at the 0.05 level.
6. Results
Table III provides simple correlations between variables. As expected, analyst
following is positively correlated with the quality of CG in both Pearson (correlation
coef?cient ¼ 0.213) and Spearman correlations (correlation coef?cient ¼ 0.204). SIZE is
negative related to FOLLOWING. This is inconsistent with the positive relation between
analyst following and ?rmsize documented in prior research. Note that my sample only
consists of the largest companies in the emerging markets. This may explain why the
expected relation between analyst following and ?rm size is not found with my sample.
Consistent with prior research, XLIST is positively and RETURN_STD and
EARNINGS_SUR are negatively related to FOLLOWING in Pearson correlation. In
Spearman correlation, only XLISTand EARNINGS_GROWTHare signi?cantly related
to FOLLOWING.
Table IV reports the results from testing whether analyst following is in?uenced by
the strength of ?rm-level CG in emerging markets. In model (1), the coef?cient on CG is
0.032 with a White-adjusted t-statistic of 4.56. This ?nding supports H1 and implies
that the effect of overall CG strength on analyst following is positive[11]. Among the
control variables, XLIST is positively signi?cant and RETURN_STD is negatively
signi?cant as expected. SIZE, EARNINGS_GROWTH, RE_CORR, and EARN-
INGS_SUR are not signi?cant. The potential explanation is that my sample consists
of the largest emerging-market companies, among which the ?rmsize, earnings growth,
return-earnings correlation, and earnings surprise do not exhibit considerable variation.
In model (2), analyst following is regressed against individual scores pertaining to
seven different aspects of CG. Among the seven CG characteristics, four aspects
(i.e. TRAN, INDP, RESP, and FAIR) are signi?cantly and positively associated with
the number of analyst following. The results are consistent with the positive relation
between analyst following and the quality of disclosure established in prior literature
(Lang and Lundholm, 1996; Hope, 2003; Bushman et al., 2005; Ali et al., 2005). The
positive association between INDP, RESP, and FAIR and analyst following suggests
that analysts are concerned about how independent the board of directors is from
controlling shareholders and senior management (INDP), how effective the board of
directors is in taking necessary measures in case of mismanagement (RESP), and how
fairly minority shareholders are treated by the majority shareholders and management
(FAIR). DSPL and ACCT are not signi?cantly associated with analyst following. SOCL
exhibits a negative relation with analyst following, which seems to imply that analysts
tend not to follow companies with more emphasis on ethical and socially responsible
behaviors in emerging markets.
SIZE is not signi?cant in the common law subsample and is negatively signi?cant
in the code law subsample. These results may be attributable to a ?rm size bias in the
sample as discussed earlier. XLIST is positively related to analyst following only in the
common law subsample. It appears that analysts like to provide earnings forecasts for
those cross-listed ?rms domiciled in countries with a common law tradition, but not
countries with a code law tradition.
Analyst
following
81
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
F
O
L
L
O
W
I
N
G
C
G
S
I
Z
E
X
L
I
S
T
E
A
R
N
I
N
G
S
_
G
R
O
W
T
H
R
E
T
U
R
N
_
S
T
D
R
E
_
C
O
R
R
E
A
R
N
I
N
G
S
_
S
U
R
F
O
L
L
O
W
I
N
G
0
.
2
1
3
(
0
.
0
1
)
2
0
.
0
9
1
(
0
.
0
1
)
0
.
1
6
6
(
0
.
0
1
)
0
.
0
4
3
(
0
.
0
3
)
2
0
.
0
6
8
(
0
.
3
3
)
2
0
.
0
5
6
(
0
.
4
5
)
0
.
0
3
0
(
0
.
6
7
)
C
G
0
.
2
0
4
(
0
.
0
1
)
2
0
.
2
5
7
(
0
.
0
1
)
0
.
0
3
7
(
0
.
2
6
)
0
.
0
2
5
(
0
.
0
4
)
2
0
.
0
8
2
(
0
.
1
3
)
2
0
.
1
1
(
0
.
0
6
)
0
.
0
2
3
(
0
.
6
7
)
S
I
Z
E
2
0
.
0
8
9
(
0
.
0
1
)
2
0
.
2
4
1
(
0
.
0
1
)
0
.
1
1
4
(
0
.
0
1
)
0
.
0
0
4
(
0
.
9
5
)
2
0
.
0
2
3
(
0
.
6
7
)
2
0
.
0
4
3
(
0
.
4
5
)
2
0
.
0
4
5
(
0
.
4
1
)
X
L
I
S
T
0
.
1
5
0
(
0
.
0
1
)
0
.
0
2
4
(
0
.
4
6
)
0
.
1
3
5
(
0
.
0
1
)
0
.
0
2
1
(
0
.
6
8
)
0
.
0
6
5
(
0
.
2
3
)
2
0
.
0
6
(
0
.
3
7
)
0
.
0
9
4
(
0
.
0
8
)
E
A
R
N
I
N
G
S
_
G
R
O
W
T
H
0
.
0
3
6
(
0
.
0
1
)
0
.
0
2
9
(
0
.
5
9
)
0
.
1
0
4
(
0
.
0
6
)
0
.
1
0
7
(
0
.
0
5
)
0
.
0
1
5
(
0
.
7
9
)
0
.
0
3
1
(
0
.
5
8
)
0
.
7
2
7
(
0
.
0
1
)
R
E
T
U
R
N
_
S
T
D
2
0
.
0
8
6
(
0
.
1
1
)
2
0
.
0
4
0
(
0
.
4
6
)
0
.
0
2
3
(
0
.
6
6
)
2
0
.
0
5
4
(
0
.
3
2
)
0
.
0
1
5
(
0
.
7
9
)
0
.
0
6
6
(
0
.
2
4
)
0
.
5
3
4
(
0
.
0
1
)
R
E
_
C
O
R
R
0
.
0
4
7
(
0
.
4
0
)
2
0
.
1
0
4
(
0
.
0
7
)
2
0
.
0
9
1
(
0
.
1
1
)
2
0
.
0
5
8
(
0
.
3
1
)
0
.
0
3
1
(
0
.
5
8
)
0
.
0
6
6
(
0
.
2
5
)
0
.
0
6
8
(
0
.
2
4
)
E
A
R
N
I
N
G
S
_
S
U
R
2
0
.
0
1
(
0
.
0
5
)
2
0
.
0
1
(
0
.
9
5
)
0
.
0
5
4
(
0
.
3
2
)
0
.
0
9
2
(
0
.
0
9
)
0
.
7
3
(
0
.
0
1
)
0
.
5
3
(
0
.
0
1
)
0
.
0
0
7
(
0
.
2
4
)
N
o
t
e
s
:
P
e
a
r
s
o
n
c
o
r
r
e
l
a
t
i
o
n
i
s
a
b
o
v
e
a
n
d
S
p
e
a
r
m
a
n
c
o
r
r
e
l
a
t
i
o
n
i
s
b
e
l
o
w
t
h
e
d
i
a
g
o
n
a
l
;
p
-
v
a
l
u
e
s
b
a
s
e
d
o
n
t
w
o
-
t
a
i
l
e
d
t
e
s
t
s
a
r
e
i
n
p
a
r
e
n
t
h
e
s
e
s
Table III.
Simple correlations
ARJ
23,1
82
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
The H2 of this paper is that the association between analyst following and the strength
of CG is stronger in common law countries. The sample is partitioned into the common
lawgroup and the code lawgroup and the models are run by each group. Table Vreports
the results based on 426 companies with a common laworigin and 327 companies with a
code law origin separately.
In the common law subsample, CG is positively associated with analyst following in
model (1). The coef?cient is 0.042 and the t-statistic is 3.81. In model (2) when all
individual CG variables are incorporated, TRAN is positive and signi?cant
(coef?cient ¼ 0.053, t-statistic ¼ 7.46). Incremental to disclosure, three individual
scores (i.e. INDP, RESP, and FAIR) are positively associated with analyst following with
coef?cients (t-statistics) of 0.014 (2.65), 0.007 (1.84) and 0.014 (2.31), respectively. Note
that the effect of disclosure (TRAN) is stronger than that of any other CGcharacteristic.
The effects of DEPL and ACCT are not signi?cant whereas the coef?cient on SOCL is
negative although signi?cant. The results for the common lawsubsample are consistent
with the ?ndings from the whole sample. By contrast, in code law countries, analyst
following is not signi?cantly associated with CG. Therefore, H2 is supported.
To rule out the possibility of time-series autocorrelation, companies with CGrankings
in both years are eliminated. This reduced sample includes only the subset of companies
that have rankings for either 2001 or 2002. There are 382 companies in this subsample,
207 companies with a common law origin and 175 companies with a code law origin.
The results (available on request) are unchanged from main tests for both models.
Hitherto the positive association between analyst following and CG suggests that
analyst following is associated with better CG. However, an alternative interpretation
can be that:
Pred. sign (1) (2)
Intercept ? 2.281
* * *
(3.54) 2.079
* * *
(3.10)
CG þ 0.033
* * *
(2.56)
TRAN þ 0.024
* * *
(4.85)
DSPL þ 20.007 (21.35)
INDP þ 0.010
* * *
(2.72)
ACCT þ 20.006 (21.16)
RESP þ 0.009
* *
(1.77)
FAIR þ 0.010
* * *
(2.59)
SOCL þ 20.011
* * *
(22.37)
SIZE þ 20.074 (20.65) 20.045 (21.23)
XLIST þ 0.790
* * *
(4.03) 0.825
* * *
(4.31)
EARNINGS_GROWTH þ 0.004 (0.72) 0.003 (1.04)
RETURN_STD 2 20.040
* *
(21.91) 20.004
* *
(22.02)
RE_CORR þ 0.301 (0.99) 0.302 (0.98)
EARNINGS_SUR 2 20.002 (20.71) 20.002
* *
(21.64)
Adj. R
2
(%) 28.9 34.1
No. of observations 753
Notes: Signi?cance at:
*
0.10,
* *
0.05, and
* * *
0.01 based on one-tailed test for signed predictions and
two-tailed tests of unsigned predictions; White adjusted t-statistics are provided; variables are de?ned
in Table II; see equations (1) and (2)
Table IV.
The association between
analyst following and CG
Analyst
following
83
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
C
o
m
m
o
n
l
a
w
s
u
b
s
a
m
p
l
e
C
o
d
e
l
a
w
s
u
b
s
a
m
p
l
e
P
r
e
d
.
s
i
g
n
(
1
)
(
2
)
(
1
)
(
2
)
I
n
t
e
r
c
e
p
t
?
0
.
6
6
5
(
0
.
6
5
)
2
1
.
1
8
9
(
2
1
.
2
1
)
3
.
8
4
7
*
*
*
(
5
.
1
4
)
4
.
0
1
3
*
*
*
(
4
.
8
5
)
C
G
þ
0
.
0
4
2
*
*
*
(
3
.
8
1
)
0
.
0
0
8
(
0
.
9
2
)
T
R
A
N
þ
0
.
0
5
3
*
*
*
(
7
.
4
6
)
0
.
0
0
1
(
0
.
2
1
)
D
S
P
L
þ
2
0
.
0
1
9
(
2
0
.
8
9
)
0
.
0
0
8
(
1
.
2
4
)
I
N
D
P
þ
0
.
0
1
4
*
*
*
(
2
.
6
5
)
0
.
0
0
2
(
0
.
3
6
)
A
C
C
T
þ
2
0
.
0
0
4
(
2
0
.
5
4
)
2
0
.
0
0
6
(
2
1
.
2
6
)
R
E
S
P
þ
0
.
0
0
7
*
*
(
1
.
8
4
)
2
0
.
0
0
1
(
2
0
.
1
4
)
F
A
I
R
þ
0
.
0
1
4
*
*
(
2
.
3
1
)
0
.
0
0
3
(
0
.
5
4
)
S
O
C
L
þ
2
0
.
0
2
7
*
*
*
(
2
4
.
1
0
)
0
.
0
0
1
(
0
.
0
2
)
S
I
Z
E
þ
0
.
0
7
2
(
0
.
9
7
)
0
.
2
8
5
(
0
.
9
4
)
2
0
.
0
9
8
*
*
*
(
2
2
.
4
6
)
2
0
.
1
0
8
*
*
*
(
2
2
.
5
9
)
X
L
I
S
T
þ
1
.
0
3
2
*
*
*
(
3
.
4
4
)
0
.
8
7
0
*
*
*
(
3
.
2
0
)
0
.
3
6
3
(
1
.
5
3
)
0
.
3
7
7
(
1
.
5
7
)
E
A
R
N
I
N
G
S
_
G
R
O
W
T
H
þ
0
.
0
1
0
(
1
.
3
9
)
0
.
0
1
2
(
1
.
0
2
)
0
.
0
1
3
*
*
*
(
2
.
2
9
)
0
.
0
1
0
(
1
.
0
0
)
R
E
T
U
R
N
_
S
T
D
2
2
0
.
0
1
2
(
2
1
.
3
1
)
2
0
.
0
1
7
(
2
1
.
0
4
)
2
0
.
0
3
2
(
1
.
0
3
)
2
0
.
0
4
4
(
2
1
.
2
1
)
R
E
_
C
O
R
R
þ
0
.
3
5
3
*
(
1
.
6
9
)
0
.
0
1
7
(
1
.
4
9
)
0
.
4
7
3
(
1
.
2
9
)
0
.
5
0
6
(
1
.
3
6
)
E
A
R
N
I
N
G
S
_
S
U
R
2
2
0
.
0
0
3
(
2
1
.
5
3
)
2
0
.
0
0
8
(
2
1
.
3
7
)
2
0
.
0
0
7
*
*
*
(
2
2
.
2
5
)
2
0
.
0
0
6
*
(
2
1
.
7
1
)
A
d
j
.
R
2
(
%
)
3
8
.
7
4
0
.
6
2
5
.
4
2
8
.
8
N
o
.
o
f
o
b
s
e
r
v
a
t
i
o
n
s
4
2
6
3
2
7
N
o
t
e
s
:
S
i
g
n
i
?
c
a
n
c
e
a
t
:
*
0
.
1
0
,
*
*
0
.
0
5
,
a
n
d
*
*
*
0
.
0
1
b
a
s
e
d
o
n
o
n
e
-
t
a
i
l
e
d
t
e
s
t
s
f
o
r
s
i
g
n
e
d
p
r
e
d
i
c
t
i
o
n
s
a
n
d
t
w
o
-
t
a
i
l
e
d
t
e
s
t
s
f
o
r
u
n
s
i
g
n
e
d
p
r
e
d
i
c
t
i
o
n
s
;
W
h
i
t
e
a
d
j
u
s
t
e
d
t
-
s
t
a
t
i
s
t
i
c
s
a
r
e
p
r
o
v
i
d
e
d
;
v
a
r
i
a
b
l
e
s
a
r
e
d
e
?
n
e
d
i
n
T
a
b
l
e
I
I
;
s
e
e
e
q
u
a
t
i
o
n
s
(
1
)
a
n
d
(
2
)
Table V.
The association between
analyst following and CG:
regressions by legal
origin
ARJ
23,1
84
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
.
a higher level of analyst following increases the quality of CG; or
.
the quality of CG and analyst following are jointly determined by a set of
exogenous variables.
Following Lang and Lundholm(1996) and Beaver et al. (1997), a two-stage least squares
regression approach and the Hausman (1978) test are utilized to examine the
endogeneity and simultaneity. The two-stage least squares regression results are
presented in Table VI. For parsimony, Table VI only shows the results of the analyst
following model with the composite measure of CG and the common law subsample
since the positive relation between analyst following and CG is only signi?cant in this
subsample.
Klapper and Love (2004) identify four determinants of CGquality: size, the growth of
sales, the property, plant and equipment to sales ratio, and the country-level investor
protection. SALES_GROWTH is measured as the growth rate of sales, averaged over
the prior three years. PPE/SALES is the ratio of property, plant and equipment to sales,
averaged over the prior three years. LEGALITY is a linear combination of the ?ve
enforcement variables motivated by La Porta et al. (1998): ef?ciency of judicial system,
rule of law, corruption, risk of expropriation, and risk of contract repudiation. These four
variables are used as instrumental variables. In the ?rst stage regression, the strength of
CG is regressed on these instrumental variables and the residual is obtained. In the
second stage regression, analyst following is regressed on the residual from the ?rst
regression and control variables. The coef?cient on the residual value is 0.033 and the
t-statistic is 2.56. Therefore, the results are similar to those obtained with the ordinary
least squares approach.
In addition, Hausman (1978) test is applied to investigate whether simultaneity is
statistically signi?cant. The instrumented CG (i.e. the predicted value of the ?rst stage
regression) is used as an additional explanatory variable in the analyst following
model. The coef?cient on the instrumented CG is not signi?cantly different from zero
Sign Analyst following
Intercept ? 1.354 (0.54)
CG_RESIDUAL þ 0.033
* * *
(2.56)
SIZE þ 20.074 (20.65)
XLIST þ 0.506
* * *
(3.28)
EARNINGS_GROWTH þ 0.019
*
(1.88)
RETURN_STD 2 20.005 (21.56)
RE_CORR þ 0.453
*
(1.88)
EARNINGS_SUR 2 0.005 (0.58)
Adj. R
2
(%) 34.0
No. of observations 426
Notes: Signi?cance at:
*
0.10,
* *
0.05, and
* * *
0.01 based on one-tailed test for signed predictions and
two-tailed tests of unsigned predictions; two-stage least squares regression; White adjusted t-statistics
are provided; Variables are de?ned in Table II; FOLLOWING
it
¼ a
0
þ a
1
CG_RESIDUAL
it
þ
a
2
SIZE
it
þ a
3
XLIST
it
þ a
4
EARNINGS_GROWTH
it
þ a
5
RETURN_STD
it
þ a
6
RE_CORR
it
þ
a
7
EARNINGS_SUR
it
þ error
it
Table VI.
The association between
analyst following and CG
Analyst
following
85
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
(t-statistic ¼ 1.45), suggesting that the quality of CG is purely exogenous and there is
no signi?cant simultaneity.
7. Conclusions
This paper examines the association of analyst following with the strength of overall
?rm-speci?c CG in an emerging-market setting. CG is assessed by the ratings compiled
by CLSA based on a wide variety of CG characteristics. Controlling for other factors,
analyst following is positively associated with the effectiveness of CG, indicating that
analysts prefer to follow well-governed companies in emerging markets. Furthermore,
not all elements of measured governance are relevant for analyst coverage decisions.
Besides, disclosure, sub-scores measuring board of director independence, board of
director effectiveness against mismanagement, and the fairness of the treatment
received by minority shareholders explain analysts’ willingness to cover a company.
As shown in prior research, the information dissemination of analysts helps reduce the
equity cost, increase the ?rm’s market liquidity and market value (Klapper and Love,
2004; Chen et al., 2005; Durnev and Kim, 2005; Chen et al., 2009). The positive
association between analyst following and ?rm-level CG documented in this paper
adds to this stream of research by indicating superior information intermediation of
?nancial analysts for well-governed companies. This paper also extends prior research
that analysts like to provide earnings forecasts for companies in strong-investor-pro-
tection countries.
This paper further investigates whether the effect of ?rm-speci?c CG on analyst
following is contingent on legal origins. The sample is partitioned based on the legal
origin of the country in which the ?rm is domiciled. The comparison of results from the
two subsamples reveals that the positive effect of CG on analyst following is only
signi?cant for the common law subsample. This ?nding is consistent with prior
research that analysts are motivated to provide superior forecasts in the common-law
settings where investor demand for disclosures is high but not in the code-law settings
where information asymmetry is solved through insider communication instead of
?rm disclosures.
This paper has the following limitations and poses opportunities for future research.
This paper provides empirical evidence primarily for the largest companies in
emerging markets because of data availability. Future research may expand the time
period and the sample size when data are available. This paper identi?es speci?c
CG characteristics that affect analysts’ willingness to follow a company. Future
research may proceed to examine why these CG aspects particularly concern ?nancial
analysts when they make coverage decisions.
Notes
1. Prior research uses the term “analyst coverage” interchangeably.
2. As argued by Lang et al. (2004), CG mechanisms can be classi?ed into country-speci?c
external mechanisms, such as shareholder protection, and ?rm-speci?c internal mechanisms,
such as ownership structure, managerial incentive provisions, and auditor choice. This paper
addresses the ?rm-speci?c internal CG mechanisms.
3. Informed insiders and sophisticated institutional investors are the other two groups of
information intermediaries. They are also possible channels through which the quality of
?rm-speci?c governance mechanisms is conveyed to the market. Bushman et al. (2004)
ARJ
23,1
86
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
consider ?nancial analysts, insiders, and institutional investors as three private information
acquisition channels.
4. The characteristics of analyst forecasts have been used as a dominant measure of the
information environment (Lang and Lundholm, 1996; Lang et al., 2003).
5. Examples of note disclosure that is incorporated in the CIFAR index include segment
information, MD&A, subsequent events, accounting policies and R&D costs.
6. They decompose S&P 500 companies into family and non-family ?rms based on Business
Week’s classi?cation. As de?ned in Business Week, a family ?rm is a company where
founders or descendants continue to hold positions in top management, on the board, or
among the company’s largest stockholders. As argued in Ali et al. (2007), family ?rms are
subject to less agency problems regarding the separation of ownership and control but suffer
from the agency problems arising between control and non-controlling shareholders.
7. There are ten countries in their sample including Australia, Denmark, Hong Kong, Israel,
Italy, Mexico, The Netherlands, The Philippines, Spain, and the UK. Australia, Hong Kong,
and the UKare classi?ed as the British-in?uence group and Denmark, Italy, The Netherlands,
and Spain are in the Continental-Europe group.
8. The number of analyst following a ?rm is averaged over the 12-month from the beginning of
the ?scal year.
9. For a subset of companies, CLSA rankings are published for both 2001 and 2002. For others,
CLSA rankings are only available for one year (i.e. either 2001 or 2002).
10. The major economies of EEMEA are Russia, Turkey, Poland, Saudi Arabia, Greece, and
South Africa, most of which (except Saudi Arabia) are considered as emerging economies of
the world.
11. The t-statistics provided in this paper are all adjusted using White’s approach. The t-statistics
in the following text mean White-adjusted t-statistics.
References
Ali, A., Klasa, S. and Yeung, E. (2005), “Industry concentration, analysts’ earnings forecasts, and
bid-ask spread”, working paper, The University of Texas, Dallas, TX.
Ali, A., Klasa, S. and Yeung, E. (2007), “Corporate disclosures by family ?rms”, Journal of
Accounting and Economics, Vol. 44 Nos 1/2, pp. 238-86.
Bai, C., Liu, Q., Lu, J., Frank, S. and Zhang, J. (2004), “Corporate governance and market valuation
in China”, Journal of Comparative Economics, Vol. 32 No. 4, pp. 599-825.
Ball, R., Kothari, S. and Robin, A. (2000), “The effect of international institutional factors on
properties of accounting earnings”, Journal of Accounting and Economics, Vol. 29 No. 1,
pp. 1-59.
Barniv, R., Myring, M. and Thomas, W. (2005), “The association between the legal and ?nancial
reporting environments and forecast performance of individual analysts”, Contemporary
Accounting Research, Vol. 22 No. 4, pp. 727-58.
Barth, M., Kasnzik, R. and McNichols, M. (2001), “Analyst coverage and intangible assets”,
Journal of Accounting Research, Vol. 39 No. 1, pp. 1-34.
Beaver, W., McAnally, M. and Stinson, C. (1997), “The information content of earnings and
prices: a simultaneous equations approach”, Journal of Accounting and Economics, Vol. 23
No. 1, pp. 53-81.
Bhushan, R. (1989), “Firm characteristics and analyst following”, Journal of Accounting and
Economics, Vol. 11 Nos 2/3, pp. 255-74.
Analyst
following
87
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
Black, B. (2001), “Does corporate governance matter? A crude test using Russian data”,
University of Pennsylvania Law Review, Vol. 149 No. 6, pp. 2131-50.
Black, B., Jang, H. and Kim, W. (2006), “Does corporate governance predict ?rms’ market values?
Evidence from Korea”, Journal of Law, Economics, & Organization, Vol. 22 No. 2,
pp. 366-413.
Bowen, R., Chen, X. and Cheng, Q. (2008), “Analyst coverage and the cost of raising equity
capital: evidence from underpricing of seasoned equity offerings”, Contemporary
Accounting Research, Vol. 25 No. 3, pp. 657-700.
Brown, L. and Caylor, M. (2006), “Corporate governance and ?rm valuation”, Journal of
Accounting & Public Policy, Vol. 25 No. 4, pp. 409-34.
Bushman, R., Piotroski, L. and Smith, A. (2004), “What determines corporate transparency?”,
Journal of Accounting Research, Vol. 42 No. 2, pp. 207-52.
Bushman, R., Piotroski, L. and Smith, A. (2005), “Insider trading restrictions and analysts’
incentives to follow ?rms”, Journal of Finance, Vol. 60 No. 1, pp. 35-66.
Byard, D., Li, Y. and Weintrop, J. (2006), “Corporate governance and the quality of ?nancial
analysts’ information”, Journal of Accounting & Public Policy, Vol. 25 No. 5, pp. 609-25.
Chang, J., Khanna, T. and Palepu, K. (2000), “Analyst activity around the world”, working paper,
Harvard Business School, Boston, MA.
Chen, K., Chen, Z. and Wei, K. (2009), “Legal protection of investors, corporate governance, and
the cost of equity capital”, Journal of Corporate Finance, Vol. 15 No. 3, pp. 273-89.
Chen, W., Chung, H., Lee, C. and Liao, W. (2005), “Corporate governance and equity liquidity:
an analysis of S&P transparency & disclosure ranking”, working paper, National Chiao
Tung University, Hsinchu.
Cheng, M. and Subramanyam, K. (2008), “Analyst following and credit ratings”, Contemporary
Accounting Research, Vol. 25 No. 4, pp. 1007-44.
Choi, J., Park, S. and Yoo, S. (2007), “The value of outside directors: evidence from corporate
governance reform in Korea”, Journal of Financial and Quantitative Analysis, Vol. 42 No. 4,
pp. 941-62.
CLSA Emerging Markets (2001), Saints and Sinners: Who’s Got Religion?, CLSA Emerging
Markets, Hong Kong.
CLSA Emerging Markets (2002), Make Me Holy. . .But not Yet!, CLSA Emerging Markets,
Hong Kong.
Durnev, A. and Kim, H. (2005), “To steal or not to steal: ?rm attributes, legal environment, and
valuation”, Journal of Finance, Vol. 60 No. 3, pp. 1461-93.
Eng, L. and Mak, T. (2003), “Corporate governance and voluntary disclosure”, Journal of
Accounting & Public Policy, Vol. 22 No. 4, pp. 325-45.
Eng, L. and Teo, H. (2000), “The relation between annual report disclosures, analysts’ earnings
forecasts and analyst following: evidence from Singapore”, Paci?c Accounting Review,
Vol. 11 No. 1, pp. 219-39.
Fan, J. and Wong, T. (2002), “Corporate ownership structure and the informativeness of
accounting earnings in East Asia”, Journal of Accounting and Economics, Vol. 33 No. 3,
pp. 401-25.
Fulkerson, C. and Meek, G. (1998), “Analysts’ earnings forecasts and the value relevance of 20-F
reconciliations from non-U.S. to U.S. GAAP”, Journal of International Financial
Management and Accounting, Vol. 9 No. 1, pp. 1-15.
ARJ
23,1
88
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
Gleason, C. and Lee, C. (2003), “Analyst forecast revisions and market price discovery”,
The Accounting Review, Vol. 78 No. 1, pp. 193-225.
Gompers, P., Ishii, J. and Metrick, A. (2003), “Corporate governance and equity prices”, Quarterly
Journal of Economics, Vol. 118 No. 1, pp. 107-15.
Gupta, P., Kennedy, D. and Weaver, S. (2005), “Corporate governance scores, Tobin’s Q and
equity prices: evidence from Canadian capital markets”, working paper, Lehigh
University, Bethlehem, PA.
Hausman, J. (1978), “Speci?cation tests in econometrics”, Econometrica, Vol. 46 No. 6, pp. 1251-71.
Ho, S. and Wong, K. (2001), “A study of the relationship between corporate governance
structures and the extent of voluntary disclosure”, Journal of International Accounting,
Auditing and Taxation, Vol. 10 No. 2, pp. 139-57.
Hope, O.-K. (2003), “Analyst following and the in?uence of disclosure components, IPOs and
ownership concentration”, Asia-Paci?c Journal of Accounting & Economics, Vol. 10 No. 2,
pp. 117-41.
Institutional Shareholder Services (2005), available at: www.issproxy.com
Khanna, T., Kogan, J. and Palepu, K. (2006), “Globalization and similarities in corporate
governance: a cross-country analysis”, Review of Economics and Statistics, Vol. 88 No. 1,
pp. 69-90.
Klapper, L. and Love, I. (2004), “Corporate governance, investor protection, and performance in
emerging markets”, Journal of Corporate Finance, Vol. 10 No. 5, pp. 703-28.
Klein, P., Shapiro, D. and Young, J. (2005), “Corporate governance, family ownership and ?rm
value: the Canadian evidence”, Corporate Governance: An International Review, Vol. 13
No. 6, pp. 769-84.
Kouwenberg, R. (2006), “Does voluntary corporate governance code adoption increase ?rm value
in emerging markets? Evidence from Thailand”, working paper, Mahidol University,
Bangkok.
Lang, M. and Lundholm, R. (1996), “Corporate disclosure policy and analyst behavior”,
The Accounting Review, Vol. 71 No. 4, pp. 467-93.
Lang, M., Lins, K. and Miller, D. (2003), “ADRs, analysts, and accuracy: does cross listing in the
United States improve a ?rm’s information environment and increase market value?”,
Journal of Accounting Research, Vol. 41 No. 2, pp. 317-45.
Lang, M., Lins, K. and Miller, D. (2004), “Concentrated control, analyst following and valuation:
do analysts matter most when investors are protected least?”, Journal of Accounting
Research, Vol. 42 No. 3, pp. 589-622.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A. and Vishny, R. (1997), “Legal determinants of
external ?nance”, Journal of Finance, Vol. 5 No. 3, pp. 1131-50.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A. and Vishny, R. (1998), “Law and ?nance”, Journal
of Political Economy, Vol. 106 No. 6, pp. 1113-55.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A. and Vishny, R. (2000), “Investor protection and
corporate governance”, Journal of Financial Economics, Vol. 58 No. 1, pp. 3-27.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A. and Vishny, R. (2002), “Investor protection and
corporate valuation”, Journal of Finance, Vol. 57 No. 3, pp. 1147-70.
Larcker, D., Richardson, S. and Tuna, I. (2007), “Corporate governance, accounting outcomes, and
organizational performance”, The Accounting Review, Vol. 82 No. 4, pp. 963-1008.
McNichols, M. and O’Brien, P. (1997), “Self-selection and analyst coverage”, Journal of
Accounting Research, Vol. 35 No. 2, pp. 167-99.
Analyst
following
89
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
Mitton, T. (2004), “Corporate governance and dividend policy in emerging markets”, Emerging
Markets Review, Vol. 5 No. 4, pp. 409-26.
O’Brien, P. and Bhushan, R. (1990), “Analyst following and institutional ownership”, Journal of
Accounting Research, Vol. 28 No. 3, pp. 55-76.
Peasnell, K., Pope, P. and Young, S. (2005), “Board monitoring and earnings management:
do outside directors in?uence abnormal accruals?”, Journal of Business Finance &
Accounting, Vol. 32 Nos 5/6, pp. 1311-46.
Roulstone, D. (2003), “Analyst following and market liquidity”, Contemporary Accounting
Research, Vol. 20 No. 3, pp. 552-78.
Shen, C. and Chih, H. (2007), “Earnings management and corporate governance in Asia’s
emerging markets”, Corporate Governance: An International Review, Vol. 15 No. 5,
pp. 999-1021.
Willekens, M., Bauwhede, H., Gaeremynck, A. and Gucht, L. (2005), “The impact of internal and
external governance mechanisms on the voluntary disclosure of ?nancial and non-?nancial
performance”, working paper, Aston Business School, Birmingham.
Xu, L. and Tang, A. (2008), “Internal control material weakness, analysts’ accuracy and bias, and
brokerage reputation”, working paper, Morgan State University, Baltimore, MD.
Further reading
Claessens, S. and Pan, J. (2002), “Corporate governance in Asia: a survey”, International Review of
Finance, Vol. 3 No. 1, pp. 71-103.
Wang, D. (2006), “Founding family ownership and earnings quality”, Journal of Accounting
Research, Vol. 44 No. 3, pp. 619-56.
Appendix. Abbreviated CLSA questionnaire
1. Discipline (15 percent)
(1) Has the company issued a “mission statement” that explicitly places a priority on good
CG? (. . .)?
(2) Is senior management incentivized to work towards a higher share price for the
company, e.g. (. . .) expected remuneration for the top executive(s) is tied to the value of
the shares?
(3) Does management stick to clearly de?ned core businesses? (Any diversi?cation into an
unrelated area in last three years would count as “No”.)
(4) [. . .] Is management’s view of its cost of equity within 10 percent of a CAPM-derived
estimate?
(5) [. . .] Is management’s estimate of its cost of capital within 10 percent of our estimate
based on its capital structure?
(6) Over the past ?ve years, is it true that the company has not issued equity, or warrants for
new equity, for acquisitions and/or ?nancing new projects where there was any
controversy over whether the acquisition/project was ?nancially sound? [. . .]
(7) Does senior management use debt for investments/capex only where ROA (or average
ROI) is clearly higher than cost of debt and where interest cover is no less than 2.5_? [. . .]
(8) Over the past ?ve years, is it true that the company has not built up cash levels [. . .]?
(9) Does the company’s Annual Report include a section devoted to the company’s
performance in implementing CG principles?
ARJ
23,1
90
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
2. Transparency (15 percent)
(10) Has management disclosed three- or ?ve-year ROA or ROE targets? [. . .]
(11) Does the company publish its Annual Report within four months of the end of the
?nancial year?
(12) Does the company publish/announce semiannual reports within two months of the end
of the half year?
(13) Does the company publish/announce quarterly reports within two months of the end of
the quarter?
(14) Has the public announcement of results been no longer than two working days of the
Board meeting? [. . .]
(15) Are the reports clear and informative? (Based on perception of analyst.) [. . .]
(16) Are accounts presented according to IGAAP? [. . .]
(17) Does the company consistently disclose major and market sensitive information
punctually? [. . .]
(18) Do analysts have good access to senior management? Good access implies accessibility
soon after results are announced and timely meetings where analysts are given all
relevant information and are not misled.
(19) Does the company have an English language web site where results and other
announcements are updated promptly (no later than one business day)?
3. Independence (15 percent)
(20) Is it true that there has been no controversy or questions raised over whether the board
and senior management have made decisions in the past ?ve years that bene?t them, at
the expense of shareholders? (Any loans to group companies/vs, non-core/non-con-
trolled group investments, would mean “No”).
(21) Is the chairman an independent, non-executive director?
(22) Does the company have an executive or management committee [. . .] which is
substantially different from members of the Board and not believed to be dominated by
major shareholders? (That is, no more than half are also board members and major
shareholder not perceived as dominating executive decision making).
(23) Does the company have an audit committee? Is it chaired by a perceived genuine
independent director?
(24) Does the company have a remuneration committee? Is it chaired by a perceived
genuine independent director?
(25) Does the company have a nominating committee? Is it chaired by a perceived genuine
independent director?
(26) Are the external auditors of the company in other respects seen to be completely
unrelated to the company?
(27) Does the board include no direct representatives of banks and other large creditors of
the company? (Having any representatives is a negative).
4. Accountability (15 percent)
(28) Are the board members and members of the executive/management committee
substantially different [. . .]? (i.e. no more than half of one committee sits on the other?)
Analyst
following
91
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
(29) Does the company have non-executive directors who are demonstrably and
unquestionably independent? (Independence of directors must be demonstrated by
either being appointed through nomination of non-major shareholders or having on
record voted on certain issues against the rest of the board. [. . .]
(30) Do independent, non-executive directors account for more than 50 percent of the board?
(31) Are there any foreign nationals on the board [. . .]?
(32) Are full Board meetings held at least once a quarter?
(33) Are board members well briefed before board meetings? [. . .] (Answers (33)-(35) must
be based on direct contact with an independent board member. If no access is provided
[. . .], answer “No” to each question).
(34) Does the audit committee nominate and conduct a proper review the work of external
auditors [. . .]?
(35) Does the audit committee supervise internal audit and accounting procedures [. . .]?
5. Responsibility (15 percent)
(36) If the board/senior management have made decisions in recent years seen to bene?t
them at the expense of shareholders (cf. question (20) above), has the company been
seen as acting effectively against individuals responsible and corrected such behavior
promptly, i.e. within six months? (If no such case, answer this question as “Yes”).
(37) [. . .] Over the past ?ve years, if there were ?agrant business failures or misdemeanors,
were the persons responsible appropriately and voluntarily punished? (If no cases [. . .],
then answer “No”).
(38) Is there any controversy or questions over whether the board and/or senior
management take measures to safeguard the interests of all and not just the dominant
shareholders? [. . .]
(39) Are there mechanisms to allow punishment of the executive/management committee in
the event of mismanagement [. . .]?
(40) Is it true that there have been no controversies/questions over whether the share
trading by board members have been fair, fully transparent, and well intentioned? [. . .]
(41) [. . .] Is the board small enough to be ef?cient and effective? (If more than 12,
answer “No”).
6. Fairness (15 percent)
(42) Is it true that there have not been any controversy or questions raised over any
decisions by senior management in the past ?ve years, where majority shareholders
are believed to have gained at the expense of minority shareholders?
(43) Do all equity holders have the right to call general meetings? [. . .]
(44) Are voting methods easily accessible (e.g. proxy voting)?
(45) Are all necessary [. . .] information for general meetings made available prior to general
meeting?
(46) Is senior management unquestionably seen as trying to ensure fair value is re?ected in
the market price of the stock [. . .]?
(47) Is it true that there has been no question or perceived controversy over whether
the company has issued depositary receipts that bene?ted primarily major
shareholders [. . .]?
(48) Does the majority shareholder group own less than 40 percent of the company?
ARJ
23,1
92
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
(49) Do foreign portfolio managers, and/or domestic portfolio investors who have a track
record in engaging management on CG issues, own at least 20 percent of the total
shares with voting rights?
(50) Does the head of Investor Relations report to either the CEO or a board member?
(51) [. . .] Over the past ?ve years, is it true that total directors remuneration has not
increased faster than net pro?t after exceptionals? [. . .]
7. Social awareness (10 percent)
(52) Does the company have an explicit (clearly worded) public policy statement that
emphasizes strict ethical behavior: that is, one that looks at the spirit and not just the
letter of the law?
(53) Does the company have a policy/culture that prohibits the employment of the
underaged [. . .]?
(54) Does the company have an explicit equal employment policy [. . .]?
(55) Does the Company adhere to speci?ed industry guidelines on sourcing of materials
[. . .]?
(56) Is the company explicitly environmentally conscious [. . .]?
(57) Is it true that the company has no investments operations in Myanmar [. . .]?
Sources: CLSA Emerging Markets (2001, 2002).
Corresponding author
Minna Yu can be contacted at: [email protected]
Analyst
following
93
To purchase reprints of this article please e-mail: [email protected]
Or visit our web site for further details: www.emeraldinsight.com/reprints
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
This article has been cited by:
1. Effiezal Aswadi Abdul Wahab, Anwar Allah Pitchay, Ruhani Ali. 2015. Culture, corporate governance
and analysts forecast in Malaysia. Asian Review of Accounting 23:3, 232-255. [Abstract] [Full Text] [PDF]
2. Sulaiman Mouselli, Khaled Hussainey. 2014. Corporate governance, analyst following and firm value.
Corporate Governance: The international journal of business in society 14:4, 453-466. [Abstract] [Full Text]
[PDF]
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
doc_932161142.pdf
The purpose of this paper is to examine the association of analyst following with the
strength of overall firm-specific corporate governance (CG) in an emerging-market setting.
Design/methodology/approach – This paper uses empirical methodology to test the h
Accounting Research Journal
Analyst following and corporate governance: emerging-market evidence
Minna Yu
Article information:
To cite this document:
Minna Yu, (2010),"Analyst following and corporate governance: emerging-market evidence", Accounting
Research J ournal, Vol. 23 Iss 1 pp. 69 - 93
Permanent link to this document:
http://dx.doi.org/10.1108/10309611011060533
Downloaded on: 24 January 2016, At: 21:10 (PT)
References: this document contains references to 56 other documents.
To copy this document: [email protected]
The fulltext of this document has been downloaded 874 times since 2010*
Users who downloaded this article also downloaded:
Rakesh Gupta, Thadavillil J ithendranathan, (2012),"Fund flows and past performance in
Australian managed funds", Accounting Research J ournal, Vol. 25 Iss 2 pp. 131-157 http://
dx.doi.org/10.1108/10309611211287314
Raghavan J . Iyengar, J udy Land, Ernest M. Zampelli, (2010),"Does board governance improve
the quality of accounting earnings?", Accounting Research J ournal, Vol. 23 Iss 1 pp. 49-68 http://
dx.doi.org/10.1108/10309611011060524
Katherine Uylangco, Steve Easton, Robert Faff, (2010),"The equity and efficiency of the Australian share
market with respect to director trading", Accounting Research J ournal, Vol. 23 Iss 1 pp. 5-19 http://
dx.doi.org/10.1108/10309611011060506
Access to this document was granted through an Emerald subscription provided by emerald-srm:115632 []
For Authors
If you would like to write for this, or any other Emerald publication, then please use our Emerald for
Authors service information about how to choose which publication to write for and submission guidelines
are available for all. Please visit www.emeraldinsight.com/authors for more information.
About Emerald www.emeraldinsight.com
Emerald is a global publisher linking research and practice to the benefit of society. The company
manages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as well as
providing an extensive range of online products and additional customer resources and services.
Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee
on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive
preservation.
*Related content and download information correct at time of download.
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
Analyst following and corporate
governance: emerging-market
evidence
Minna Yu
Monmouth University, West Long Branch, New Jersey, USA
Abstract
Purpose – The purpose of this paper is to examine the association of analyst following with the
strength of overall ?rm-speci?c corporate governance (CG) in an emerging-market setting.
Design/methodology/approach – This paper uses empirical methodology to test the hypothesis
with a sample of 753 emerging-market companies over 2001 and 2002.
Findings – It is found that the effectiveness of CG has a positive impact on the level of analyst
following. Further analyses indicate that this positive relation is concentrated in the countries with a
common law tradition.
Research limitations/implications – This paper joins prior research by providing evidence on the
information intermediary role of ?nancial analysts. It also provides supporting evidence on analysts’
monitoring role in common law countries of emerging markets.
Practical implications – The ?ndings of this paper have implications for the decision making of
managers and investors. By improving CG at the ?rm level, companies can signi?cantly improve their
information environments. The ?ndings of this paper also have important implications for standard
setters and regulators in emerging economies by shedding light on the importance of requesting ?rms
to have good CG mechanisms in place, particularly in countries with relatively strong investor
protection.
Originality/value – Although prior research has documented the positive effect of country-level
investor protection or a single aspect of ?rm-level CG on analyst following, it is unknown whether the
level of analyst following is associated with the quality of ?rm-speci?c CG. This paper ?lls in this
research gap by empirically investigating this relation.
Keywords Financial analysis, Corporate governance, Emerging markets
Paper type Research paper
1. Introduction
This paper examines the association between the number of analysts following a
company and the strength of ?rm-level corporate governance (CG) in the emerging-
market context. Prior research uses the number of analysts following a company
(analyst following hereafter)[1] to indicate the amount of private information acquired
by ?nancial analysts and considers ?nancial analyst information a major component of
a ?rm’s information environment (Gleason and Lee, 2003; Bushman et al., 2004). The
market assimilates earnings news more quickly and completely when companies are
followed by a large number of analysts (Gleason and Lee, 2003). Also, companies
followed by a large number of analysts tend to have higher market liquidity (Roulstone,
2003), lower cost of equity (Bowen et al., 2008), less default risk (Cheng and
Subramanyam, 2008), and higher valuation (Lang et al., 2003). Given the positive impact
of a high level of analyst following on pricing ef?ciency, it is important to know what
?rm characteristics in?uence the decision of analysts to follow particular companies.
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1030-9616.htm
Analyst
following
69
Accounting Research Journal
Vol. 23 No. 1, 2010
pp. 69-93
qEmerald Group Publishing Limited
1030-9616
DOI 10.1108/10309611011060533
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
CG generally refers to a set of mechanisms through which outside investors protect
themselves against expropriation by insiders (La Porta et al., 2000). Additionally, CG is
the set of mechanisms that in?uence the decisions made by managers when there is
separation of ownership and control (Larcker et al., 2007, p. 964)[2]. In recent years,
investors of companies with weak CG practices have sustained billions of dollars of
losses (Institutional Shareholder Services, 2005). The stock price collapse of Adelphia,
Enron, and WorldCom were largely due to poor governance (Brown and Caylor, 2006).
The quality of CG therefore has been used as a key criterion for investment decisions.
Prior research has documented that ?rms in emerging markets that follow
recommended CG practices tends to have a lower cost of equity (Chen et al., 2009),
greater liquidity (Chen et al., 2005), and a higher market valuation (Klapper and Love,
2004; Durnev and Kim, 2005). A ?rm’s good CG is re?ected in its stock price through a
number of channels, one of which is the information intermediation by ?nancial
analysts[3]. Given the positive association between high analyst following and pricing
ef?ciency, it is important to examine whether analysts prefer to follow ?rms with
good CG. A high level of analyst following will consequently help the market to
ef?ciently incorporate the differences in CG across ?rms.
Prior research has documented a positive association between analyst following
and country-level investor protection (Chang et al., 2000) as well as between analyst
following and individual ?rm-level CG mechanisms (Hope, 2003; Lang et al., 2004;
Ali et al., 2007). However, little is known about whether the overall ?rm-level CG
in?uences the level of analyst following. The current paper adds to our knowledge on
how analyst following is associated with the quality of ?rm-speci?c CG by using a CG
ranking of emerging market companies to assess the strength of CG.
The ?rst hypothesis of this paper is that:
H1. The number of analysts following the company is positively related to the
quality of CG in emerging markets.
Companies with effective governance mechanisms provide more reliable earnings
information and more disclosures (Ho and Wong, 2001), costing analysts less time and
resources to research a company and also improving analysts’ forecast performance
(Byard et al., 2006). The lower cost and higher forecast accuracy will in turn motivate
analysts to provide earnings forecasts for such companies. Indeed, prior research has
documented the positive relation between analyst following and the extent of ?rm
disclosures (Lang and Landholm, 1996; Ali et al., 2005). In addition to ?rm disclosures,
effective CG mechanisms discipline managers to work in the interest of investors,
which results in future pro?tability in emerging markets (Klapper and Love, 2004;
Durnev and Kim, 2005). Research has shown that analysts prefer to follow ?rms with
less agency problems and more investment potential (McNichols and O’Brien, 1997;
Hope, 2003; Lang et al., 2004; Ali et al., 2007). Therefore, analysts are more likely to
follow ?rms with effective CG mechanisms.
The results obtained with 753 companies from 26 emerging economies show that
the aggregate CG ranking, calculated as the average of seven individual governance
scores, has a positive relation to analyst following. Further analysis reveals that
analyst following is incrementally associated with CG practices that are not related to
disclosure. Taken together, the results support the view that analysts prefer to provide
earnings forecasts for better-governed ?rms not only because of their better disclosures
ARJ
23,1
70
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
but also because of the governance characteristics that relate to the independence,
responsibility and fairness of the board and management.
The second hypothesis of this paper is that:
H2. The positive relation between analyst following and the quality of CG is
stronger in common law countries.
La Porta et al. (1997, 1998, 2000, 2002) classify countries into common and code law
countries based on their legal origins and argue that this legal origin approach is a
fruitful way to understand ?rm-speci?c CG. As argued by Ball et al. (2000), the CG in
code law countries features agents representing large shareholders. Information
asymmetry is moderated primarily through insider communication. As a consequence,
managers are closely monitored. In contrast, companies in common law countries have
diversi?ed investors. Therefore, in common law countries, good CG at the ?rm level is
critical to ensure good management, which in turn, leads to high-quality disclosures as
well as superior operating performance. In addition, prior research has documented
that analysts have more incentives to provide earnings forecasts and perform better,
and also analysts’ forecasts are more value relevant in common law countries than in
code law countries (Fulkerson and Meek, 1998; Chang et al., 2000; Barniv et al., 2005).
As such, it is expected that analysts are more likely to carefully select companies to follow
in common lawcountries. That is, they will look into the companies’ CGmechanisms and
evaluate them in making their coverage decisions.
To test the H2, the sample is divided into two subsamples: companies in common
law countries and companies in code law countries. There are 426 ?rm-year
observations from eight common law countries and 327 ?rm-year observations from
18 code law countries. As predicted, the positive impact of CG on analyst following can
only be traced to countries with a common law origin. The evidence supports this
conjecture that better CG leads to a higher level of analyst following in common law
countries but not in code law countries within the emerging markets.
This paper contributes to the extant literature in two ways. First, it advances our
understanding of the association between analyst following and CG by documenting
that the quality of ?rm-level CG is a determinant of analyst following. Recent research
has concentrated on how the country-level investor protection (Chang et al., 2000) or a
single aspect of ?rm-level CG (Hope, 2003; Lang et al., 2004; Ali et al., 2007) in?uences
analyst following. The current paper uses both composite and disaggregated measures
of CG quality. The positive association between analyst following and the strength of
?rm-speci?c CG suggests that the greater information distribution by ?nancial
analysts is a channel through which better-governed companies are rewarded by the
market[4].
Second, the results from the common law versus code law partition suggest that the
positive relation between analyst following and ?rm-speci?c CG is traced to common
law countries, characterized as providing strong investor protection. That is, ?rm-level
CG is a factor that ?nancial analysts consider in making coverage decisions only in
countries with relatively strong investor protection. These ?ndings are in line with
prior studies that analysts have more incentives to play an active role in common law
countries (Fulkerson and Meek, 1998; Chang et al., 2000; Barniv et al., 2005).
The ?ndings of this study have implications for managers and investors by
demonstrating that companies with strong CG mechanisms enjoy better information
Analyst
following
71
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
environments, as evidenced by the greater analyst following. Furthermore, the ?ndings
in regard to what aspects of CG are particularly important in determining analysts’
willingness to follow a company inform companies about the relative signi?cance of
certain CG mechanisms. For standard setters and regulators in emerging economies,
this paper suggests the importance of requiring companies to establish and maintain
good CG mechanisms, particularly in countries with stronger investor protection.
The rest of the paper proceeds as follows. Section 2 reviews related literature. The
hypotheses tested are developed in Section 3. Section 4 describes the models used to
test the hypotheses. Section 5 summarizes data and sample. Section 6 presents results
and Section 7 concludes the paper.
2. Prior literature
Prior empirical research has documented the bene?ts of having a high level of analyst
following. Lang et al. (2003) ?nd that companies with a higher level of analyst following
enjoy higher valuations. Roulstone (2003) documents a positive impact of analyst
following on market liquidity measured by bid-ask spreads and depths. Bowen et al.
(2008) ?nd that a higher level of analyst following is associated with less underpricing of
seasoned equity offerings, which suggests lower cost of equity for heavily followed
?rms. Cheng and Subramanyam (2008) document that the default risk, as proxied by
credit rating, is lower when a company is followed by a large number of analysts.
Given the advantages of having a high level of analyst following, it is important to
know what factors in?uence analysts’ coverage decisions. Empirical research generally
uses the level of analyst following to proxy for analysts’ incentives to evaluate ?rms.
Bhushan (1989) identi?es ?rm size as a determinant of analyst following and ?nds that
analysts follow large ?rms. McNichols and O’Brien (1997) argue that analysts’ effort
allocation depends on their expectations of the company’s future performance.
Speci?cally, analysts choose to report earnings forecasts only when they hold favorable
views about the future performance of the stock. They provide evidence that analysts’
stock recommendations are more optimistic and return on equity is higher for added
stocks than those they previously covered. On the contrary, analysts’ stock
recommendations are more pessimistic and return on equity is lower for discontinued
stocks compared with those stocks they continue to follow. Barth et al. (2001) document
that analysts like to follow ?rms with more intangible assets, consistent with the view
that analysts have more incentives to follow mispriced ?rms.
Prior research also establishes a positive association between analyst following and
the level of disclosure. In the USA, Lang and Lundholm (1996) ?nd that analysts tend
to follow companies with more disclosures. Ali et al. (2005) corroborate this ?nding
using industry concentration as a proxy for disclosure. Eng and Teo (2000) document a
positive relation between analyst following and the level of annual report disclosures in
Singapore. Using a sample of companies from 40 countries, Hope (2003) ?nds analyst
following to be positively associated with the extent of note disclosures[5]. Lang et al.
(2003) reveal that analysts are more likely to follow companies cross-listed on US
exchanges than those not cross-listed, consistent with analysts bene?ting from the
superior information environment of cross-listed companies. Bushman et al. (2005) ?nd
that analysts are more likely to follow a company in countries where insider trading is
hampered and they also found that increase in analyst following upon the restriction of
insider trading is more pronounced in emerging market economies.
ARJ
23,1
72
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
A number of studies provide international evidence on the association between
analyst following and the strength of CG. Chang et al. (2000) ?nd that the level of
analyst following is generally higher in common law countries. Hope (2003) predicts
and documents that analysts are less likely to follow companies with concentrated
ownership. Lang et al. (2004) ?nd that analyst following is lower for companies with
potential incentives to hold or manipulate information, such as when the family/
management group holds the largest controlling interest. They interpret this ?nding as
CG playing an important role in analysts’ willingness to follow companies. Ali et al.
(2007) provide evidence that compared with non-family ?rms, family ?rms enjoy
greater analyst following, consistent with family ?rms attracting analysts because of
lower overall agency costs[6]. Hope (2003), Lang et al. (2004) and Ali et al. (2007) all use
ownership structure as a proxy for the strength of CG. However, ownership structure is
only one aspect of CG. The current paper uses a comprehensive measure of the extent
to which a company has adopted best practices in CG.
Prior research in emerging market economies generally suggests that ?rms with
strong CG mechanisms are highly valued. Bai et al. (2004) ?nd a positive effect of
governance mechanisms on market valuation in China. Black et al. (2006) and Choi et al.
(2007) document that an overall CG index is positively related to market value in
Korea. Kouwenberg (2006) ?nd the positive valuation effect of CG in Thailand. These
studies examine individual governance characteristics in single countries. Using the
Credit Lyonnais Securities Asia (CLSA) ranking as the measure of the overall CGquality,
Klapper and Love (2004) and Durnev and Kim (2005) document that better CG
is associated with higher operating performance and higher Tobin’s Q, which is a proxy
for market valuation. Chen et al. (2009) ?nd that the score on the CGmechanisms provided
by CLSA is negatively associated with the cost of equity capital. Chen et al. (2005)
document that the CLSAscore is positively related to market liquidity. The current paper
differs from this stream of research by studying whether establishing good CG
mechanisms is associated with improvement in ?rms’ information environments.
3. Research hypotheses
Analyst following can be explained by the quality of CG in emerging economies for at
least two reasons. First, Shen and Chih (2007) ?nd that a company with good
CG mechanisms is less likely to conduct earnings management, thereby giving
?nancial analysts more reliable information to work with in assessing the company’s
investment potential. In addition, companies with effective CG mechanisms tend to
disclose more high-quality information (Ho and Wong, 2001; Fan and Wong, 2002;
Eng and Mak, 2003; Peasnell et al., 2005; Willekens et al., 2005). The high-quality
information provided by the ?rm also improves the predictability of earnings.
In support of this conjecture, Byard et al. (2006) document that analyst forecast
accuracy is positively related to the quality of CG. Xu and Tang (2008) ?nd lower
analyst forecast accuracy when ?rms’ internal control is weak. The availability and
high quality of the ?rm-disclosed information lowers an analyst’s costs of providing
earnings forecasts and improves the forecast accuracy, which give analysts more
incentives to follow the company.
Second, as information intermediaries, analysts collect information to assess
the economic viability and investment potential of a company (Lang et al., 2004).
McNichols and O’Brien (1997) argue that analysts’ effort allocation depends on their
Analyst
following
73
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
expectations of the company’s future performance. Speci?cally, analysts choose to
report earnings forecasts only when they hold favorable views about the future
performance of the stock. With a global sample, Hope (2003) argues that analyst value
the potential for future revenues and supports this argument with evidence that analyst
following is greater in environments with active initial public offering markets. Hope
(2003) also predicts and ?nds that ?rms with concentrated ownership have lower
analyst following. Lang et al. (2004) document a negative relation between analyst
following and the level of ownership concentration, consistent with that analysts are
reluctant to provide earnings forecasts for ?rms with less effective managerial control.
Ali et al. (2007) also document that family companies, which have less severe overall
agency problems compared with non-family ?rms, tend to be followed by more
analysts.
In a company with good CG mechanisms, stockholders have superior ability to
directly monitor managers and therefore the company faces less severe agency
problems from separation of ownership. Managers are more motivated to work in the
interest of investors, which leads to future pro?tability. Consistent with this view,
Klapper and Love (2004) document a positive relation between the strength of CG and
operating performance in emerging markets. Since good CG is associated with better
management and better future economic viability, analysts have greater incentives to
follow a better-governed ?rm.
This paper studies whether CG affects analyst following in an emerging market
setting because of the signi?cance of ?rm-level CG to emerging market companies in
which the agency costs are relatively high. Prior research in developed countries has
either found that ?rm-speci?c CG has no economically signi?cant effect on market
value or has documented mixed results (Gompers et al., 2003; Klein et al., 2005; Gupta
et al., 2005; Brown and Caylor, 2006; Larcker et al., 2007). Black (2001) attributes the
mixed results to the legal system, stock exchange rules, and behavioral norms in
developed countries, which ensure that a majority of companies have adopted a certain
level of CG. In other words, there is little variance in ?rm-level governance practices
among companies in developed countries. By contrast, companies in emerging markets
establish CG mechanisms at signi?cantly different levels where favorable economic
consequences of good CG have been documented (Klapper and Love, 2004; Chen et al.,
2005, 2009; Durnev and Kim, 2005).
The observed positive association between CG and performance in emerging
markets is because that, compared with developed countries, these emerging-market
countries have higher agency costs resulting from weaker investor protection and
greater uncertainty in the capital markets. Subsequently, CG is more important for
these countries and hence analysts place greater importance on the CG practices of
?rms in emerging markets. The hypothesis in an alternative form is:
H1. In emerging markets, analyst following is positively associated with the
quality of CG practices.
This paper further examines whether the legal origins of the countries where companies
are domiciled in affect the relation between analyst following and the quality of CG.
In this paper, a stronger relation between analyst following and CG is expected in
common law countries. La Porta et al. (1998) argue that the legal approach is a fruitful
way to understand CG. Ball et al. (2000) establish that companies in code law countries
ARJ
23,1
74
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
adopt a stakeholder model of CG. That is, the board of directors is represented by elected
agents for interested parties including banks, government, major customers and
suppliers, and even employees, who hold large blocks and can effectively monitor
managers. Implementing good CG is not critical to a company’s success as the agency
problemis easily solved through the communications between these related parties and
managers without CGmechanisms (La Porta et al., 1998; Ball et al., 2000). By contrast, in
the shareholder CGmodel of common lawcountries, board members do not usually hold
large blocks of shares and monitoring managers is largely through the capital market.
It follows that CG mechanisms are particularly important to discipline management in
common law countries but not code law countries. In line with this conjecture, Mitton
(2004) ?nds that ?rms with stronger CG issue more dividends in common lawcountries
of emerging markets. However, the dividend payouts are not in?uenced by the
effectiveness of CG in code law countries.
The relation between analyst following and CG is strengthened in common law
countries also because analysts are motivated to a greater extent and therefore play a
more active role as information intermediaries in common law countries. That is, the
primary method of ?nancing in common law countries is through external equity
market, giving rise to high demand for disclosures and analyst service. Analysts, in turn,
respond to investors’ demand by providing high quality earnings forecasts. Fulkerson
and Meek (1998) ?nd that the earnings forecasts by analysts pre-empt the information
content of the US GAAP reconciliation information in common law countries but not
in code law countries[7]. Chang et al. (2000) document higher forecast accuracy, less
forecast dispersion and higher analyst following for companies in common law
countries. Barniv et al. (2005) predict and ?nd that analysts with superior ability and
resources are more likely to outperformtheir peers in common lawcountries than in code
lawcountries. Given the role analysts play in the common lawcountries, analysts should
choose the ?rms to cover in a more effective way. Therefore, they will more likely
consider the quality of CG in their coverage decisions. Based on the above arguments,
the second hypothesis is:
H2. In emerging markets, the positive relation between analyst following and CG
is more pronounced in common law than in code law countries.
4. Research models
The following model modi?ed from Lang et al. (2004) is employed to test H1:
FOLLOWING
it
¼ a
0
þ a
1
CG
it
þ a
2
SIZE
it
þ a
3
XLIST
it
þ a
4
EARNINGS_GROWTH
it
þ a
5
RETURN_STD
it
þ a
6
RE_CORR
it
þ a
7
EARNINGS_SUR
it
þ error
it
ð1Þ
where subscript i indicates the ?rm and t indicates the year:
FOLLOWING ¼ the number of analysts who issued annual earnings
forecasts in I/B/E/S in 2001 or 2002 averaged over a
12-month period[8].
CG ¼ the measure of corporate governance mechanisms,
calculated as the mean of all seven dimensions of CG
reported by CLSA.
Analyst
following
75
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
SIZE ¼ the log of total assets.
XLIST ¼ 1 if the ?rm has an ADR traded in the USA that requires
reconciliation to US GAAP reporting standards.
EARNINGS_GROWTH ¼ the average growth in earnings over the preceding three
years.
RETURN_STD ¼ the standard deviation of returns over the preceding
three years.
RE_CORR ¼ the correlation between annual returns and earnings
over the preceding three years;
EARNINGS_SUR ¼ the absolute value of the difference between
current-year EPS and prior-year EPS de?ated by price.
The aggregate CG ranking published by CLSA is utilized to measure the strength of
CG mechanisms (See the Appendix). Analyst following (FOLLOWING) is de?ned as
the average number of analysts who issued annual earnings forecasts in I/B/E/S
International ?les. Since CLSA rankings were published in April 2001 and February
2002, the average number of analysts following a company is used over the period from
April 2001 to January 2002 (from February 2002 to January 2003) for the rankings
published in April 2001 (February 2002). The individual forecasts in the eleventh
month of the ?scal year-end to count the number of analysts following a company is
alternatively used as O’Brien and Bhushan (1990) suggest that analyst following levels
off in this month. The results are qualitatively unchanged.
Following Lang et al. (2004), six ?rm-level control variables are added in the analyst
following model. SIZE is the log value of total assets (in million US$). Lang et al. (2003)
?nd that non-US ?rms that cross-list in the USA enjoy greater analyst coverage than
?rms that are not cross-listed. Therefore, a dummy variable (XLIST) is added that
equals 1 if the company has an ADRtraded in the USAthat requires reconciliation to US
GAAP reporting standards and 0 otherwise. Consistent with Lang et al. (2003, 2004),
a positive sign on both SIZE and XLIST is expected. Four other control variables are
included following Lang and Lundholm (1996) and Lang et al. (2004): earnings growth
(EARNINGS_GROWTH), return-earnings correlation (RE_CORR), the standard
deviation of returns (RETURN_STD), and earnings surprise (EARNINGS_SUR).
Consistent with these two studies, EARNINGS_GROWTH and RE_CORR are expected
to be positive and RETURN_STD and EARNINGS_SUR are expected to be negative.
Industry and country dummy variables are included to control for the ?xed effects.
In addition, two dummy variables are included to control for the year effect. The ?rst
dummy variable is 1 if a company has CLSA rankings for both 2001 and 2002 and 0
otherwise. The second dummy variable is 1 if CLSArankings published in 2001 are used
and 0 if CLSA rankings published in 2002 are used[9].
Next, the model is rerun by replacing the overall score of CG with each of the seven
individual scores pertaining to different aspects of CG. “Transparency” (TRAN) is
the ability of outsiders to assess the true position of a company. “Discipline” (DSPL)
is management’s commitment to shareholder value and ?nancial discipline.
“Independence” (INDP) is the board of directors’ independence from controlling
shareholders and senior management. “Accountability” (ACCT) is the accountability of
ARJ
23,1
76
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
management to the board of directors. “Responsibility” (RESP) is the effectiveness of the
board in taking necessary measures in case of mismanagement. “Fairness” (FAIR) is the
treatment minority shareholders receive from majority shareholders and management.
“Social awareness” (SOCL) is the company’s emphasis on ethical and socially
responsible behavior. The model is as follows:
FOLLOWING
it
¼ b
0
þ b
1
CG
it
þ b
2
DSPL
it
þ b
3
INDP
it
þ b
4
ACCT
it
þ b
5
RESP
it
þ b
6
FAIR
it
þ b
7
SOCL
it
þ b
8
SIZE
it
þ b
9
XLIST
it
þ b
10
EARNINGS_GROWTH
it
þ b
11
RETURN_STD
it
þ b
12
RE_CORR
it
þ b
13
EARNINGS_SUR
it
þ error
it
ð2Þ
5. Sample and data
The CG rankings provided by the CLSA survey are employed to measure the overall
CG quality in emerging markets. As mentioned in the previous section, seven aspects
of CG mechanisms are considered in this survey. Prior research has tested the validity
of CLSA as a proxy for the effectiveness of CG. For example, Khanna et al. (2006) ?nd
that Indian companies with low CLSA scores do have more instances of minority
shareholder expropriation and other kinds of CG problems reported on the media.
Durnev and Kim (2005) provide the same results with the scandal index in
84 companies from 14 countries. Prior studies that adopt CLSA as a measure of the
CG effectiveness include Klapper and Love (2004), Bushman et al. (2004), Chen et al.
(2005), Ali et al. (2007) and Chen et al. (2009).
The sample selection procedure is provided in Panel A of Table I. It begins with the
491 and 498 companies surveyed by CLSA in 2001 and 2002 from 25 emerging markets
in Asia, Latin America, Eastern Europe, the Middle East and Africa (EEMEA)[10]. The
number of analyst following is obtained from Institutional Brokers’ Estimate System
(I/B/E/S) International Summary and Detail ?les. Because of missing data in I/B/E/S,
117 observations were deleted. Financial statement data used to calculate control
variables are gathered from Global Vantage. XLIST is collected from the Bank of
New York Global Equity Investing Depository Receipt Service list. Owing to missing
data in these two sources, another 119 observations are removed from the sample.
The ?nal sample is composed of 753 ?rm-year observations over 2001 and 2002.
In Panel B, the sample is decomposed according to legal traditions and countries.
There are 426 and 327 observations in the common law (eight countries) and code law
partitions (18 countries), respectively. The average number of analyst following is 5.02
for common law countries and 4.30 for code law countries. Consistent with Chang et al.
(2000), the average number of analysts following a company is greater when the
country’s legal protection is stronger. Companies in common law countries also
demonstrate stronger CG than companies in code law countries: the average CG
ranking score is 61.61 for common law countries and 52.79 for code law countries.
Panel Aof Table II provides descriptive statistics for the whole sample. The average
number of analysts following a company is 4.66. The company with the largest analyst
following is covered by 16 analysts and the company with the smallest analyst following
is covered by 1 analyst. The mean of CLSA CG rankings is 56.97 with a standard
deviation of 13.92. These rankings range from 10.5 to 93.5, with a median of 58.60.
The median of XLIST is 0, indicating that more than half of the companies are listed in
the US stock markets.
Analyst
following
77
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
Panel B of Table II reports the descriptive statistics for common law and code law
subsamples. Comparing the means of the variables reveals the following. First, although
analyst following is larger in common law countries (difference ¼ 0.72), the difference
across the two subsamples is only signi?cant at the 0.10 level (t-statistic ¼ 1.37). Second,
the overall quality of CGis signi?cant higher in common lawcountries (difference ¼ 8.82,
t-statistic ¼ 5.83). So are all seven individual CG dimensions. Third, EARNINGS_-
GROWTH, RETRUN_STD, RE_CORR are not signi?cantly different between the two
subsamples. However, the differences in the other three control variables (i.e. SIZE,
XLIST, and EARNINGS_SUR) are signi?cant. On average, companies from code law
countries are larger thanthose fromcommon lawcountries. The percentage of cross-listed
Panel A: sample selection
No. of observations
Initial sample: 999
Less: missing data in I/B/E/S (127)
Equals: 872
Less: missing data in Worldscope (119)
Final sample: 753
Panel B: sample breakdown by legal origin and country
No. of companies
Average no. of
analyst following Average CG score
Common law countries
Hong Kong 92 7.23 61.30
India 125 3.56 59.36
Israel 3 1.29 39.40
Malaysia 81 6.41 61.34
Pakistan 8 1.06 34.06
Singapore 74 6.04 63.24
South Africa 50 3.23 71.07
Sri Lanka 1 3.63 50.55
Total (average) 426 (5.02) (61.61)
Code law countries
Argentina 6 2.93 62.85
Brazil 60 5.01 60.18
Bulgaria 1 4.00 15.40
Chile 20 2.32 62.51
China 36 5.93 46.44
Colombia 2 1.00 54.65
Czech Republic 4 1.76 39.30
Greece 2 6.19 57.15
Hungary 3 3.14 43.23
Indonesia 29 4.25 38.10
Korea 24 2.83 58.80
Mexico 15 4.17 62.51
Peru 2 3.1 73.50
Philippine 32 3.90 45.21
Poland 8 2.56 37.96
Taiwan 72 4.40 57.32
Turkey 23 2.98 42.04
Venezuela 1 3.57 67.10
Total (average) 327 (4.30) (52.79)
Table I.
Sample selection and
descriptive statistics
ARJ
23,1
78
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
P
a
n
e
l
A
:
w
h
o
l
e
s
a
m
p
l
e
V
a
r
i
a
b
l
e
s
M
e
a
n
S
D
M
i
n
.
M
e
d
i
a
n
M
a
x
.
F
O
L
L
O
W
I
N
G
4
.
6
6
2
.
6
9
1
4
.
3
3
1
6
T
R
A
N
6
1
.
2
7
1
9
.
3
5
0
6
0
1
0
0
D
S
P
L
5
2
.
9
2
2
0
.
5
4
0
5
5
.
6
0
1
0
0
I
N
D
P
5
7
.
8
3
2
7
.
1
2
0
7
1
.
4
0
1
0
0
A
C
C
T
4
9
.
1
1
2
2
.
0
4
0
5
0
.
0
0
1
0
0
R
E
S
P
5
1
.
5
9
2
1
.
8
3
0
5
0
.
0
0
1
0
0
F
A
I
R
6
4
.
9
6
2
7
.
2
0
0
7
7
.
8
0
1
0
0
S
O
C
L
6
9
.
8
4
2
1
.
7
6
0
6
6
.
7
0
1
0
0
C
G
5
6
.
9
7
1
3
.
9
2
1
0
.
5
5
8
.
6
0
9
3
.
5
S
I
Z
E
1
0
.
4
2
2
.
7
5
4
.
1
1
9
.
8
9
8
0
.
4
8
X
L
I
S
T
0
.
3
1
0
.
4
6
0
0
1
E
A
R
N
I
N
G
S
_
G
R
O
W
T
H
2
1
.
7
6
3
.
7
7
2
6
.
5
3
2
1
.
5
6
8
.
6
0
R
E
T
U
R
N
_
S
T
D
2
.
8
6
3
.
3
0
0
.
1
5
1
.
5
1
1
3
.
7
2
R
E
_
C
O
R
R
2
0
.
0
4
0
.
7
0
2
1
2
0
.
0
1
1
E
A
R
N
I
N
G
S
_
S
U
R
2
1
.
5
1
1
2
.
4
0
2
1
6
.
6
2
0
.
5
8
3
8
.
2
8
P
a
n
e
l
B
:
c
o
m
m
o
n
l
a
w
a
n
d
c
o
d
e
l
a
w
s
u
b
s
a
m
p
l
e
s
C
o
m
m
o
n
l
a
w
s
u
b
s
a
m
p
l
e
C
o
d
e
l
a
w
s
u
b
s
a
m
p
l
e
V
a
r
i
a
b
l
e
s
M
e
a
n
S
D
M
i
n
.
M
e
d
i
a
n
M
a
x
.
M
e
a
n
S
D
M
i
n
.
M
e
d
i
a
n
M
a
x
.
t
-
t
e
s
t
F
O
L
L
O
W
I
N
G
5
.
0
2
4
.
3
6
1
4
2
5
4
.
3
0
3
.
2
8
1
4
1
5
0
.
7
2
(
1
.
3
7
)
*
T
R
A
N
6
1
.
3
7
1
6
.
6
9
1
0
6
0
1
0
0
5
4
.
0
9
1
2
.
5
5
1
3
.
9
5
4
.
4
9
0
.
4
7
.
2
8
(
1
.
4
7
)
*
D
S
P
L
5
6
.
8
6
2
1
.
2
8
0
5
5
.
6
1
0
0
4
9
.
3
9
1
9
.
8
4
1
1
.
1
4
4
.
4
1
0
0
7
.
4
7
(
3
.
7
4
)
*
*
*
(
c
o
n
t
i
n
u
e
d
)
Table II.
Descriptive statistics
Analyst
following
79
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
I
N
D
P
6
4
.
1
3
2
6
.
5
4
7
.
1
7
1
.
4
1
0
0
5
3
.
4
3
2
5
.
1
4
7
.
1
6
2
.
5
1
0
0
1
0
.
7
*
*
*
(
4
.
2
6
)
A
C
C
T
4
8
.
5
9
2
0
.
8
1
0
5
0
1
0
0
4
5
.
4
3
2
3
.
1
9
0
5
0
1
0
0
3
.
1
6
(
1
.
4
8
)
*
R
E
S
P
5
6
.
0
3
1
9
.
1
6
0
5
0
1
0
0
4
6
.
2
1
1
9
.
7
1
0
5
0
1
0
0
9
.
8
2
(
5
.
2
1
)
*
*
*
F
A
I
R
7
5
.
3
8
2
3
.
5
4
1
1
.
1
8
3
.
3
1
0
0
5
7
.
2
7
2
5
.
9
3
0
6
0
1
0
0
1
8
.
1
1
(
7
.
5
4
)
*
*
*
S
O
C
L
7
0
.
2
0
2
1
.
8
2
1
1
.
1
6
6
.
7
1
0
0
6
7
.
2
2
2
3
.
2
5
0
6
6
.
7
1
0
0
2
.
9
8
(
1
.
3
6
)
*
C
G
6
1
.
6
1
1
3
.
0
7
1
8
.
9
6
3
.
2
5
9
1
.
4
5
2
.
7
9
1
2
.
5
5
1
3
.
9
5
4
.
4
9
0
.
4
8
.
8
2
(
5
.
8
3
)
*
*
*
S
I
Z
E
8
.
8
7
1
.
7
1
4
.
8
5
8
.
7
5
1
3
.
1
0
1
1
.
2
5
2
.
5
9
6
.
4
7
1
0
.
7
9
1
7
.
5
7
2
2
.
3
8
(
2
1
1
.
1
7
)
*
*
*
X
L
I
S
T
0
.
3
0
0
.
4
6
0
0
1
0
.
3
9
0
.
4
9
0
0
1
2
0
.
0
9
(
2
2
.
0
5
)
*
*
*
E
A
R
N
I
N
G
S
_
G
R
O
W
T
H
2
0
.
1
7
1
0
.
5
3
2
4
5
.
7
6
2
1
.
0
7
9
7
.
3
9
2
1
1
.
5
0
9
4
.
7
5
2
1
,
1
4
3
.
5
2
2
0
.
6
8
4
6
.
3
3
1
1
.
3
3
(
1
.
5
7
)
*
R
E
T
U
R
N
_
S
T
D
4
.
5
8
1
6
.
9
7
0
.
1
5
1
.
4
1
1
5
0
.
4
8
3
.
9
4
6
.
2
6
0
.
2
0
1
.
7
4
4
9
.
4
5
0
.
6
4
(
0
.
4
6
)
R
E
_
C
O
R
R
0
.
0
1
0
.
7
3
2
1
0
.
0
6
1
2
0
.
0
9
0
.
6
7
2
1
2
0
.
0
2
1
0
.
1
(
1
.
2
8
)
E
A
R
N
I
N
G
S
_
S
U
R
1
4
.
2
1
1
1
6
.
0
9
2
6
5
.
4
6
2
0
.
1
8
1
,
0
8
8
.
4
4
2
1
1
.
2
5
1
5
2
.
7
1
2
1
,
9
4
6
.
7
6
0
.
2
5
1
0
4
.
2
8
2
5
.
4
6
(
1
.
7
5
)
*
*
N
o
t
e
s
:
S
i
g
n
i
?
c
a
n
c
e
a
t
:
*
0
.
1
0
,
*
*
0
.
0
5
,
*
*
*
0
.
0
1
l
e
v
e
l
s
,
r
e
s
p
e
c
t
i
v
e
l
y
;
v
a
r
i
a
b
l
e
d
e
?
n
i
t
i
o
n
s
:
F
O
L
L
O
W
I
N
G
i
s
t
h
e
a
v
e
r
a
g
e
n
u
m
b
e
r
o
f
a
n
a
l
y
s
t
s
w
h
o
i
s
s
u
e
d
a
n
n
u
a
l
e
a
r
n
i
n
g
s
f
o
r
e
c
a
s
t
s
i
n
I
/
B
/
E
/
S
i
n
2
0
0
1
o
r
2
0
0
2
;
T
R
A
N
i
s
t
h
e
a
b
i
l
i
t
y
o
f
o
u
t
s
i
d
e
r
s
t
o
a
s
s
e
s
s
t
h
e
t
r
u
e
p
o
s
i
t
i
o
n
o
f
a
c
o
m
p
a
n
y
;
D
S
P
L
i
s
m
a
n
a
g
e
m
e
n
t
’
s
c
o
m
m
i
t
m
e
n
t
t
o
s
h
a
r
e
h
o
l
d
e
r
v
a
l
u
e
a
n
d
?
n
a
n
c
i
a
l
d
i
s
c
i
p
l
i
n
e
;
I
N
D
P
i
s
t
h
e
b
o
a
r
d
o
f
d
i
r
e
c
t
o
r
’
s
i
n
d
e
p
e
n
d
e
n
c
e
f
r
o
m
c
o
n
t
r
o
l
l
i
n
g
s
h
a
r
e
h
o
l
d
e
r
s
a
n
d
s
e
n
i
o
r
m
a
n
a
g
e
m
e
n
t
;
A
C
C
T
i
s
t
h
e
a
c
c
o
u
n
t
a
b
i
l
i
t
y
o
f
m
a
n
a
g
e
m
e
n
t
t
o
t
h
e
b
o
a
r
d
o
f
d
i
r
e
c
t
o
r
s
;
R
E
S
P
i
s
t
h
e
e
f
f
e
c
t
i
v
e
n
e
s
s
o
f
t
h
e
b
o
a
r
d
i
n
t
a
k
i
n
g
n
e
c
e
s
s
a
r
y
m
e
a
s
u
r
e
s
i
n
c
a
s
e
o
f
m
i
s
m
a
n
a
g
e
m
e
n
t
;
F
A
I
R
i
s
t
h
e
t
r
e
a
t
m
e
n
t
m
i
n
o
r
i
t
y
s
h
a
r
e
h
o
l
d
e
r
s
r
e
c
e
i
v
e
f
r
o
m
m
a
j
o
r
i
t
y
s
h
a
r
e
h
o
l
d
e
r
s
a
n
d
m
a
n
a
g
e
m
e
n
t
;
S
O
C
L
i
s
t
h
e
c
o
m
p
a
n
y
’
s
e
m
p
h
a
s
i
s
o
n
e
t
h
i
c
a
l
a
n
d
s
o
c
i
a
l
l
y
r
e
s
p
o
n
s
i
b
l
e
b
e
h
a
v
i
o
r
;
C
G
i
s
t
h
e
s
t
r
e
n
g
t
h
o
f
C
G
m
e
c
h
a
n
i
s
m
s
,
c
a
l
c
u
l
a
t
e
d
a
s
t
h
e
m
e
a
n
o
f
a
l
l
d
i
m
e
n
s
i
o
n
s
i
n
c
l
u
d
i
n
g
T
R
A
N
,
D
S
P
L
,
I
N
D
P
,
A
C
C
T
,
R
E
S
P
,
F
A
I
R
a
n
d
S
O
C
L
;
S
I
Z
E
i
s
t
h
e
l
o
g
v
a
l
u
e
o
f
t
o
t
a
l
a
s
s
e
t
s
;
X
L
I
S
T
i
s
a
n
i
n
d
i
c
a
t
o
r
v
a
r
i
a
b
l
e
t
h
a
t
e
q
u
a
l
s
1
i
f
t
h
e
?
r
m
h
a
s
a
n
A
D
R
t
r
a
d
e
d
i
n
t
h
e
U
S
A
t
h
a
t
r
e
q
u
i
r
e
s
r
e
c
o
n
c
i
l
i
a
t
i
o
n
t
o
U
S
G
A
A
P
r
e
p
o
r
t
i
n
g
s
t
a
n
d
a
r
d
s
;
E
A
R
N
I
N
G
S
_
G
R
O
W
T
H
i
s
t
h
e
a
v
e
r
a
g
e
g
r
o
w
t
h
i
n
e
a
r
n
i
n
g
s
o
v
e
r
t
h
e
p
r
e
c
e
d
i
n
g
t
h
r
e
e
y
e
a
r
s
;
R
E
T
U
R
N
_
S
T
D
i
s
t
h
e
s
t
a
n
d
a
r
d
d
e
v
i
a
t
i
o
n
o
f
r
e
t
u
r
n
s
o
v
e
r
t
h
e
p
r
e
c
e
d
i
n
g
t
h
r
e
e
y
e
a
r
s
;
R
E
_
C
O
R
R
i
s
t
h
e
c
o
r
r
e
l
a
t
i
o
n
b
e
t
w
e
e
n
a
n
n
u
a
l
r
e
t
u
r
n
s
a
n
d
e
a
r
n
i
n
g
s
o
v
e
r
t
h
e
p
r
e
c
e
d
i
n
g
t
h
r
e
e
y
e
a
r
s
;
E
A
R
N
I
N
G
S
_
S
U
R
i
s
t
h
e
a
b
s
o
l
u
t
e
v
a
l
u
e
o
f
t
h
e
d
i
f
f
e
r
e
n
c
e
b
e
t
w
e
e
n
c
u
r
r
e
n
t
-
y
e
a
r
E
P
S
a
n
d
p
r
i
o
r
-
y
e
a
r
E
P
S
d
e
?
a
t
e
d
b
y
p
r
i
c
e
Table II.
ARJ
23,1
80
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
companies is larger in code law countries (39 percent) than in common law countries
(30 percent). EARNINGS_SUR is positive in common law countries and negative in code
law countries. The difference in EARNGS_SUR is 25.46, signi?cant at the 0.05 level.
6. Results
Table III provides simple correlations between variables. As expected, analyst
following is positively correlated with the quality of CG in both Pearson (correlation
coef?cient ¼ 0.213) and Spearman correlations (correlation coef?cient ¼ 0.204). SIZE is
negative related to FOLLOWING. This is inconsistent with the positive relation between
analyst following and ?rmsize documented in prior research. Note that my sample only
consists of the largest companies in the emerging markets. This may explain why the
expected relation between analyst following and ?rm size is not found with my sample.
Consistent with prior research, XLIST is positively and RETURN_STD and
EARNINGS_SUR are negatively related to FOLLOWING in Pearson correlation. In
Spearman correlation, only XLISTand EARNINGS_GROWTHare signi?cantly related
to FOLLOWING.
Table IV reports the results from testing whether analyst following is in?uenced by
the strength of ?rm-level CG in emerging markets. In model (1), the coef?cient on CG is
0.032 with a White-adjusted t-statistic of 4.56. This ?nding supports H1 and implies
that the effect of overall CG strength on analyst following is positive[11]. Among the
control variables, XLIST is positively signi?cant and RETURN_STD is negatively
signi?cant as expected. SIZE, EARNINGS_GROWTH, RE_CORR, and EARN-
INGS_SUR are not signi?cant. The potential explanation is that my sample consists
of the largest emerging-market companies, among which the ?rmsize, earnings growth,
return-earnings correlation, and earnings surprise do not exhibit considerable variation.
In model (2), analyst following is regressed against individual scores pertaining to
seven different aspects of CG. Among the seven CG characteristics, four aspects
(i.e. TRAN, INDP, RESP, and FAIR) are signi?cantly and positively associated with
the number of analyst following. The results are consistent with the positive relation
between analyst following and the quality of disclosure established in prior literature
(Lang and Lundholm, 1996; Hope, 2003; Bushman et al., 2005; Ali et al., 2005). The
positive association between INDP, RESP, and FAIR and analyst following suggests
that analysts are concerned about how independent the board of directors is from
controlling shareholders and senior management (INDP), how effective the board of
directors is in taking necessary measures in case of mismanagement (RESP), and how
fairly minority shareholders are treated by the majority shareholders and management
(FAIR). DSPL and ACCT are not signi?cantly associated with analyst following. SOCL
exhibits a negative relation with analyst following, which seems to imply that analysts
tend not to follow companies with more emphasis on ethical and socially responsible
behaviors in emerging markets.
SIZE is not signi?cant in the common law subsample and is negatively signi?cant
in the code law subsample. These results may be attributable to a ?rm size bias in the
sample as discussed earlier. XLIST is positively related to analyst following only in the
common law subsample. It appears that analysts like to provide earnings forecasts for
those cross-listed ?rms domiciled in countries with a common law tradition, but not
countries with a code law tradition.
Analyst
following
81
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
F
O
L
L
O
W
I
N
G
C
G
S
I
Z
E
X
L
I
S
T
E
A
R
N
I
N
G
S
_
G
R
O
W
T
H
R
E
T
U
R
N
_
S
T
D
R
E
_
C
O
R
R
E
A
R
N
I
N
G
S
_
S
U
R
F
O
L
L
O
W
I
N
G
0
.
2
1
3
(
0
.
0
1
)
2
0
.
0
9
1
(
0
.
0
1
)
0
.
1
6
6
(
0
.
0
1
)
0
.
0
4
3
(
0
.
0
3
)
2
0
.
0
6
8
(
0
.
3
3
)
2
0
.
0
5
6
(
0
.
4
5
)
0
.
0
3
0
(
0
.
6
7
)
C
G
0
.
2
0
4
(
0
.
0
1
)
2
0
.
2
5
7
(
0
.
0
1
)
0
.
0
3
7
(
0
.
2
6
)
0
.
0
2
5
(
0
.
0
4
)
2
0
.
0
8
2
(
0
.
1
3
)
2
0
.
1
1
(
0
.
0
6
)
0
.
0
2
3
(
0
.
6
7
)
S
I
Z
E
2
0
.
0
8
9
(
0
.
0
1
)
2
0
.
2
4
1
(
0
.
0
1
)
0
.
1
1
4
(
0
.
0
1
)
0
.
0
0
4
(
0
.
9
5
)
2
0
.
0
2
3
(
0
.
6
7
)
2
0
.
0
4
3
(
0
.
4
5
)
2
0
.
0
4
5
(
0
.
4
1
)
X
L
I
S
T
0
.
1
5
0
(
0
.
0
1
)
0
.
0
2
4
(
0
.
4
6
)
0
.
1
3
5
(
0
.
0
1
)
0
.
0
2
1
(
0
.
6
8
)
0
.
0
6
5
(
0
.
2
3
)
2
0
.
0
6
(
0
.
3
7
)
0
.
0
9
4
(
0
.
0
8
)
E
A
R
N
I
N
G
S
_
G
R
O
W
T
H
0
.
0
3
6
(
0
.
0
1
)
0
.
0
2
9
(
0
.
5
9
)
0
.
1
0
4
(
0
.
0
6
)
0
.
1
0
7
(
0
.
0
5
)
0
.
0
1
5
(
0
.
7
9
)
0
.
0
3
1
(
0
.
5
8
)
0
.
7
2
7
(
0
.
0
1
)
R
E
T
U
R
N
_
S
T
D
2
0
.
0
8
6
(
0
.
1
1
)
2
0
.
0
4
0
(
0
.
4
6
)
0
.
0
2
3
(
0
.
6
6
)
2
0
.
0
5
4
(
0
.
3
2
)
0
.
0
1
5
(
0
.
7
9
)
0
.
0
6
6
(
0
.
2
4
)
0
.
5
3
4
(
0
.
0
1
)
R
E
_
C
O
R
R
0
.
0
4
7
(
0
.
4
0
)
2
0
.
1
0
4
(
0
.
0
7
)
2
0
.
0
9
1
(
0
.
1
1
)
2
0
.
0
5
8
(
0
.
3
1
)
0
.
0
3
1
(
0
.
5
8
)
0
.
0
6
6
(
0
.
2
5
)
0
.
0
6
8
(
0
.
2
4
)
E
A
R
N
I
N
G
S
_
S
U
R
2
0
.
0
1
(
0
.
0
5
)
2
0
.
0
1
(
0
.
9
5
)
0
.
0
5
4
(
0
.
3
2
)
0
.
0
9
2
(
0
.
0
9
)
0
.
7
3
(
0
.
0
1
)
0
.
5
3
(
0
.
0
1
)
0
.
0
0
7
(
0
.
2
4
)
N
o
t
e
s
:
P
e
a
r
s
o
n
c
o
r
r
e
l
a
t
i
o
n
i
s
a
b
o
v
e
a
n
d
S
p
e
a
r
m
a
n
c
o
r
r
e
l
a
t
i
o
n
i
s
b
e
l
o
w
t
h
e
d
i
a
g
o
n
a
l
;
p
-
v
a
l
u
e
s
b
a
s
e
d
o
n
t
w
o
-
t
a
i
l
e
d
t
e
s
t
s
a
r
e
i
n
p
a
r
e
n
t
h
e
s
e
s
Table III.
Simple correlations
ARJ
23,1
82
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
The H2 of this paper is that the association between analyst following and the strength
of CG is stronger in common law countries. The sample is partitioned into the common
lawgroup and the code lawgroup and the models are run by each group. Table Vreports
the results based on 426 companies with a common laworigin and 327 companies with a
code law origin separately.
In the common law subsample, CG is positively associated with analyst following in
model (1). The coef?cient is 0.042 and the t-statistic is 3.81. In model (2) when all
individual CG variables are incorporated, TRAN is positive and signi?cant
(coef?cient ¼ 0.053, t-statistic ¼ 7.46). Incremental to disclosure, three individual
scores (i.e. INDP, RESP, and FAIR) are positively associated with analyst following with
coef?cients (t-statistics) of 0.014 (2.65), 0.007 (1.84) and 0.014 (2.31), respectively. Note
that the effect of disclosure (TRAN) is stronger than that of any other CGcharacteristic.
The effects of DEPL and ACCT are not signi?cant whereas the coef?cient on SOCL is
negative although signi?cant. The results for the common lawsubsample are consistent
with the ?ndings from the whole sample. By contrast, in code law countries, analyst
following is not signi?cantly associated with CG. Therefore, H2 is supported.
To rule out the possibility of time-series autocorrelation, companies with CGrankings
in both years are eliminated. This reduced sample includes only the subset of companies
that have rankings for either 2001 or 2002. There are 382 companies in this subsample,
207 companies with a common law origin and 175 companies with a code law origin.
The results (available on request) are unchanged from main tests for both models.
Hitherto the positive association between analyst following and CG suggests that
analyst following is associated with better CG. However, an alternative interpretation
can be that:
Pred. sign (1) (2)
Intercept ? 2.281
* * *
(3.54) 2.079
* * *
(3.10)
CG þ 0.033
* * *
(2.56)
TRAN þ 0.024
* * *
(4.85)
DSPL þ 20.007 (21.35)
INDP þ 0.010
* * *
(2.72)
ACCT þ 20.006 (21.16)
RESP þ 0.009
* *
(1.77)
FAIR þ 0.010
* * *
(2.59)
SOCL þ 20.011
* * *
(22.37)
SIZE þ 20.074 (20.65) 20.045 (21.23)
XLIST þ 0.790
* * *
(4.03) 0.825
* * *
(4.31)
EARNINGS_GROWTH þ 0.004 (0.72) 0.003 (1.04)
RETURN_STD 2 20.040
* *
(21.91) 20.004
* *
(22.02)
RE_CORR þ 0.301 (0.99) 0.302 (0.98)
EARNINGS_SUR 2 20.002 (20.71) 20.002
* *
(21.64)
Adj. R
2
(%) 28.9 34.1
No. of observations 753
Notes: Signi?cance at:
*
0.10,
* *
0.05, and
* * *
0.01 based on one-tailed test for signed predictions and
two-tailed tests of unsigned predictions; White adjusted t-statistics are provided; variables are de?ned
in Table II; see equations (1) and (2)
Table IV.
The association between
analyst following and CG
Analyst
following
83
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
C
o
m
m
o
n
l
a
w
s
u
b
s
a
m
p
l
e
C
o
d
e
l
a
w
s
u
b
s
a
m
p
l
e
P
r
e
d
.
s
i
g
n
(
1
)
(
2
)
(
1
)
(
2
)
I
n
t
e
r
c
e
p
t
?
0
.
6
6
5
(
0
.
6
5
)
2
1
.
1
8
9
(
2
1
.
2
1
)
3
.
8
4
7
*
*
*
(
5
.
1
4
)
4
.
0
1
3
*
*
*
(
4
.
8
5
)
C
G
þ
0
.
0
4
2
*
*
*
(
3
.
8
1
)
0
.
0
0
8
(
0
.
9
2
)
T
R
A
N
þ
0
.
0
5
3
*
*
*
(
7
.
4
6
)
0
.
0
0
1
(
0
.
2
1
)
D
S
P
L
þ
2
0
.
0
1
9
(
2
0
.
8
9
)
0
.
0
0
8
(
1
.
2
4
)
I
N
D
P
þ
0
.
0
1
4
*
*
*
(
2
.
6
5
)
0
.
0
0
2
(
0
.
3
6
)
A
C
C
T
þ
2
0
.
0
0
4
(
2
0
.
5
4
)
2
0
.
0
0
6
(
2
1
.
2
6
)
R
E
S
P
þ
0
.
0
0
7
*
*
(
1
.
8
4
)
2
0
.
0
0
1
(
2
0
.
1
4
)
F
A
I
R
þ
0
.
0
1
4
*
*
(
2
.
3
1
)
0
.
0
0
3
(
0
.
5
4
)
S
O
C
L
þ
2
0
.
0
2
7
*
*
*
(
2
4
.
1
0
)
0
.
0
0
1
(
0
.
0
2
)
S
I
Z
E
þ
0
.
0
7
2
(
0
.
9
7
)
0
.
2
8
5
(
0
.
9
4
)
2
0
.
0
9
8
*
*
*
(
2
2
.
4
6
)
2
0
.
1
0
8
*
*
*
(
2
2
.
5
9
)
X
L
I
S
T
þ
1
.
0
3
2
*
*
*
(
3
.
4
4
)
0
.
8
7
0
*
*
*
(
3
.
2
0
)
0
.
3
6
3
(
1
.
5
3
)
0
.
3
7
7
(
1
.
5
7
)
E
A
R
N
I
N
G
S
_
G
R
O
W
T
H
þ
0
.
0
1
0
(
1
.
3
9
)
0
.
0
1
2
(
1
.
0
2
)
0
.
0
1
3
*
*
*
(
2
.
2
9
)
0
.
0
1
0
(
1
.
0
0
)
R
E
T
U
R
N
_
S
T
D
2
2
0
.
0
1
2
(
2
1
.
3
1
)
2
0
.
0
1
7
(
2
1
.
0
4
)
2
0
.
0
3
2
(
1
.
0
3
)
2
0
.
0
4
4
(
2
1
.
2
1
)
R
E
_
C
O
R
R
þ
0
.
3
5
3
*
(
1
.
6
9
)
0
.
0
1
7
(
1
.
4
9
)
0
.
4
7
3
(
1
.
2
9
)
0
.
5
0
6
(
1
.
3
6
)
E
A
R
N
I
N
G
S
_
S
U
R
2
2
0
.
0
0
3
(
2
1
.
5
3
)
2
0
.
0
0
8
(
2
1
.
3
7
)
2
0
.
0
0
7
*
*
*
(
2
2
.
2
5
)
2
0
.
0
0
6
*
(
2
1
.
7
1
)
A
d
j
.
R
2
(
%
)
3
8
.
7
4
0
.
6
2
5
.
4
2
8
.
8
N
o
.
o
f
o
b
s
e
r
v
a
t
i
o
n
s
4
2
6
3
2
7
N
o
t
e
s
:
S
i
g
n
i
?
c
a
n
c
e
a
t
:
*
0
.
1
0
,
*
*
0
.
0
5
,
a
n
d
*
*
*
0
.
0
1
b
a
s
e
d
o
n
o
n
e
-
t
a
i
l
e
d
t
e
s
t
s
f
o
r
s
i
g
n
e
d
p
r
e
d
i
c
t
i
o
n
s
a
n
d
t
w
o
-
t
a
i
l
e
d
t
e
s
t
s
f
o
r
u
n
s
i
g
n
e
d
p
r
e
d
i
c
t
i
o
n
s
;
W
h
i
t
e
a
d
j
u
s
t
e
d
t
-
s
t
a
t
i
s
t
i
c
s
a
r
e
p
r
o
v
i
d
e
d
;
v
a
r
i
a
b
l
e
s
a
r
e
d
e
?
n
e
d
i
n
T
a
b
l
e
I
I
;
s
e
e
e
q
u
a
t
i
o
n
s
(
1
)
a
n
d
(
2
)
Table V.
The association between
analyst following and CG:
regressions by legal
origin
ARJ
23,1
84
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
.
a higher level of analyst following increases the quality of CG; or
.
the quality of CG and analyst following are jointly determined by a set of
exogenous variables.
Following Lang and Lundholm(1996) and Beaver et al. (1997), a two-stage least squares
regression approach and the Hausman (1978) test are utilized to examine the
endogeneity and simultaneity. The two-stage least squares regression results are
presented in Table VI. For parsimony, Table VI only shows the results of the analyst
following model with the composite measure of CG and the common law subsample
since the positive relation between analyst following and CG is only signi?cant in this
subsample.
Klapper and Love (2004) identify four determinants of CGquality: size, the growth of
sales, the property, plant and equipment to sales ratio, and the country-level investor
protection. SALES_GROWTH is measured as the growth rate of sales, averaged over
the prior three years. PPE/SALES is the ratio of property, plant and equipment to sales,
averaged over the prior three years. LEGALITY is a linear combination of the ?ve
enforcement variables motivated by La Porta et al. (1998): ef?ciency of judicial system,
rule of law, corruption, risk of expropriation, and risk of contract repudiation. These four
variables are used as instrumental variables. In the ?rst stage regression, the strength of
CG is regressed on these instrumental variables and the residual is obtained. In the
second stage regression, analyst following is regressed on the residual from the ?rst
regression and control variables. The coef?cient on the residual value is 0.033 and the
t-statistic is 2.56. Therefore, the results are similar to those obtained with the ordinary
least squares approach.
In addition, Hausman (1978) test is applied to investigate whether simultaneity is
statistically signi?cant. The instrumented CG (i.e. the predicted value of the ?rst stage
regression) is used as an additional explanatory variable in the analyst following
model. The coef?cient on the instrumented CG is not signi?cantly different from zero
Sign Analyst following
Intercept ? 1.354 (0.54)
CG_RESIDUAL þ 0.033
* * *
(2.56)
SIZE þ 20.074 (20.65)
XLIST þ 0.506
* * *
(3.28)
EARNINGS_GROWTH þ 0.019
*
(1.88)
RETURN_STD 2 20.005 (21.56)
RE_CORR þ 0.453
*
(1.88)
EARNINGS_SUR 2 0.005 (0.58)
Adj. R
2
(%) 34.0
No. of observations 426
Notes: Signi?cance at:
*
0.10,
* *
0.05, and
* * *
0.01 based on one-tailed test for signed predictions and
two-tailed tests of unsigned predictions; two-stage least squares regression; White adjusted t-statistics
are provided; Variables are de?ned in Table II; FOLLOWING
it
¼ a
0
þ a
1
CG_RESIDUAL
it
þ
a
2
SIZE
it
þ a
3
XLIST
it
þ a
4
EARNINGS_GROWTH
it
þ a
5
RETURN_STD
it
þ a
6
RE_CORR
it
þ
a
7
EARNINGS_SUR
it
þ error
it
Table VI.
The association between
analyst following and CG
Analyst
following
85
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
(t-statistic ¼ 1.45), suggesting that the quality of CG is purely exogenous and there is
no signi?cant simultaneity.
7. Conclusions
This paper examines the association of analyst following with the strength of overall
?rm-speci?c CG in an emerging-market setting. CG is assessed by the ratings compiled
by CLSA based on a wide variety of CG characteristics. Controlling for other factors,
analyst following is positively associated with the effectiveness of CG, indicating that
analysts prefer to follow well-governed companies in emerging markets. Furthermore,
not all elements of measured governance are relevant for analyst coverage decisions.
Besides, disclosure, sub-scores measuring board of director independence, board of
director effectiveness against mismanagement, and the fairness of the treatment
received by minority shareholders explain analysts’ willingness to cover a company.
As shown in prior research, the information dissemination of analysts helps reduce the
equity cost, increase the ?rm’s market liquidity and market value (Klapper and Love,
2004; Chen et al., 2005; Durnev and Kim, 2005; Chen et al., 2009). The positive
association between analyst following and ?rm-level CG documented in this paper
adds to this stream of research by indicating superior information intermediation of
?nancial analysts for well-governed companies. This paper also extends prior research
that analysts like to provide earnings forecasts for companies in strong-investor-pro-
tection countries.
This paper further investigates whether the effect of ?rm-speci?c CG on analyst
following is contingent on legal origins. The sample is partitioned based on the legal
origin of the country in which the ?rm is domiciled. The comparison of results from the
two subsamples reveals that the positive effect of CG on analyst following is only
signi?cant for the common law subsample. This ?nding is consistent with prior
research that analysts are motivated to provide superior forecasts in the common-law
settings where investor demand for disclosures is high but not in the code-law settings
where information asymmetry is solved through insider communication instead of
?rm disclosures.
This paper has the following limitations and poses opportunities for future research.
This paper provides empirical evidence primarily for the largest companies in
emerging markets because of data availability. Future research may expand the time
period and the sample size when data are available. This paper identi?es speci?c
CG characteristics that affect analysts’ willingness to follow a company. Future
research may proceed to examine why these CG aspects particularly concern ?nancial
analysts when they make coverage decisions.
Notes
1. Prior research uses the term “analyst coverage” interchangeably.
2. As argued by Lang et al. (2004), CG mechanisms can be classi?ed into country-speci?c
external mechanisms, such as shareholder protection, and ?rm-speci?c internal mechanisms,
such as ownership structure, managerial incentive provisions, and auditor choice. This paper
addresses the ?rm-speci?c internal CG mechanisms.
3. Informed insiders and sophisticated institutional investors are the other two groups of
information intermediaries. They are also possible channels through which the quality of
?rm-speci?c governance mechanisms is conveyed to the market. Bushman et al. (2004)
ARJ
23,1
86
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
consider ?nancial analysts, insiders, and institutional investors as three private information
acquisition channels.
4. The characteristics of analyst forecasts have been used as a dominant measure of the
information environment (Lang and Lundholm, 1996; Lang et al., 2003).
5. Examples of note disclosure that is incorporated in the CIFAR index include segment
information, MD&A, subsequent events, accounting policies and R&D costs.
6. They decompose S&P 500 companies into family and non-family ?rms based on Business
Week’s classi?cation. As de?ned in Business Week, a family ?rm is a company where
founders or descendants continue to hold positions in top management, on the board, or
among the company’s largest stockholders. As argued in Ali et al. (2007), family ?rms are
subject to less agency problems regarding the separation of ownership and control but suffer
from the agency problems arising between control and non-controlling shareholders.
7. There are ten countries in their sample including Australia, Denmark, Hong Kong, Israel,
Italy, Mexico, The Netherlands, The Philippines, Spain, and the UK. Australia, Hong Kong,
and the UKare classi?ed as the British-in?uence group and Denmark, Italy, The Netherlands,
and Spain are in the Continental-Europe group.
8. The number of analyst following a ?rm is averaged over the 12-month from the beginning of
the ?scal year.
9. For a subset of companies, CLSA rankings are published for both 2001 and 2002. For others,
CLSA rankings are only available for one year (i.e. either 2001 or 2002).
10. The major economies of EEMEA are Russia, Turkey, Poland, Saudi Arabia, Greece, and
South Africa, most of which (except Saudi Arabia) are considered as emerging economies of
the world.
11. The t-statistics provided in this paper are all adjusted using White’s approach. The t-statistics
in the following text mean White-adjusted t-statistics.
References
Ali, A., Klasa, S. and Yeung, E. (2005), “Industry concentration, analysts’ earnings forecasts, and
bid-ask spread”, working paper, The University of Texas, Dallas, TX.
Ali, A., Klasa, S. and Yeung, E. (2007), “Corporate disclosures by family ?rms”, Journal of
Accounting and Economics, Vol. 44 Nos 1/2, pp. 238-86.
Bai, C., Liu, Q., Lu, J., Frank, S. and Zhang, J. (2004), “Corporate governance and market valuation
in China”, Journal of Comparative Economics, Vol. 32 No. 4, pp. 599-825.
Ball, R., Kothari, S. and Robin, A. (2000), “The effect of international institutional factors on
properties of accounting earnings”, Journal of Accounting and Economics, Vol. 29 No. 1,
pp. 1-59.
Barniv, R., Myring, M. and Thomas, W. (2005), “The association between the legal and ?nancial
reporting environments and forecast performance of individual analysts”, Contemporary
Accounting Research, Vol. 22 No. 4, pp. 727-58.
Barth, M., Kasnzik, R. and McNichols, M. (2001), “Analyst coverage and intangible assets”,
Journal of Accounting Research, Vol. 39 No. 1, pp. 1-34.
Beaver, W., McAnally, M. and Stinson, C. (1997), “The information content of earnings and
prices: a simultaneous equations approach”, Journal of Accounting and Economics, Vol. 23
No. 1, pp. 53-81.
Bhushan, R. (1989), “Firm characteristics and analyst following”, Journal of Accounting and
Economics, Vol. 11 Nos 2/3, pp. 255-74.
Analyst
following
87
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
Black, B. (2001), “Does corporate governance matter? A crude test using Russian data”,
University of Pennsylvania Law Review, Vol. 149 No. 6, pp. 2131-50.
Black, B., Jang, H. and Kim, W. (2006), “Does corporate governance predict ?rms’ market values?
Evidence from Korea”, Journal of Law, Economics, & Organization, Vol. 22 No. 2,
pp. 366-413.
Bowen, R., Chen, X. and Cheng, Q. (2008), “Analyst coverage and the cost of raising equity
capital: evidence from underpricing of seasoned equity offerings”, Contemporary
Accounting Research, Vol. 25 No. 3, pp. 657-700.
Brown, L. and Caylor, M. (2006), “Corporate governance and ?rm valuation”, Journal of
Accounting & Public Policy, Vol. 25 No. 4, pp. 409-34.
Bushman, R., Piotroski, L. and Smith, A. (2004), “What determines corporate transparency?”,
Journal of Accounting Research, Vol. 42 No. 2, pp. 207-52.
Bushman, R., Piotroski, L. and Smith, A. (2005), “Insider trading restrictions and analysts’
incentives to follow ?rms”, Journal of Finance, Vol. 60 No. 1, pp. 35-66.
Byard, D., Li, Y. and Weintrop, J. (2006), “Corporate governance and the quality of ?nancial
analysts’ information”, Journal of Accounting & Public Policy, Vol. 25 No. 5, pp. 609-25.
Chang, J., Khanna, T. and Palepu, K. (2000), “Analyst activity around the world”, working paper,
Harvard Business School, Boston, MA.
Chen, K., Chen, Z. and Wei, K. (2009), “Legal protection of investors, corporate governance, and
the cost of equity capital”, Journal of Corporate Finance, Vol. 15 No. 3, pp. 273-89.
Chen, W., Chung, H., Lee, C. and Liao, W. (2005), “Corporate governance and equity liquidity:
an analysis of S&P transparency & disclosure ranking”, working paper, National Chiao
Tung University, Hsinchu.
Cheng, M. and Subramanyam, K. (2008), “Analyst following and credit ratings”, Contemporary
Accounting Research, Vol. 25 No. 4, pp. 1007-44.
Choi, J., Park, S. and Yoo, S. (2007), “The value of outside directors: evidence from corporate
governance reform in Korea”, Journal of Financial and Quantitative Analysis, Vol. 42 No. 4,
pp. 941-62.
CLSA Emerging Markets (2001), Saints and Sinners: Who’s Got Religion?, CLSA Emerging
Markets, Hong Kong.
CLSA Emerging Markets (2002), Make Me Holy. . .But not Yet!, CLSA Emerging Markets,
Hong Kong.
Durnev, A. and Kim, H. (2005), “To steal or not to steal: ?rm attributes, legal environment, and
valuation”, Journal of Finance, Vol. 60 No. 3, pp. 1461-93.
Eng, L. and Mak, T. (2003), “Corporate governance and voluntary disclosure”, Journal of
Accounting & Public Policy, Vol. 22 No. 4, pp. 325-45.
Eng, L. and Teo, H. (2000), “The relation between annual report disclosures, analysts’ earnings
forecasts and analyst following: evidence from Singapore”, Paci?c Accounting Review,
Vol. 11 No. 1, pp. 219-39.
Fan, J. and Wong, T. (2002), “Corporate ownership structure and the informativeness of
accounting earnings in East Asia”, Journal of Accounting and Economics, Vol. 33 No. 3,
pp. 401-25.
Fulkerson, C. and Meek, G. (1998), “Analysts’ earnings forecasts and the value relevance of 20-F
reconciliations from non-U.S. to U.S. GAAP”, Journal of International Financial
Management and Accounting, Vol. 9 No. 1, pp. 1-15.
ARJ
23,1
88
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
Gleason, C. and Lee, C. (2003), “Analyst forecast revisions and market price discovery”,
The Accounting Review, Vol. 78 No. 1, pp. 193-225.
Gompers, P., Ishii, J. and Metrick, A. (2003), “Corporate governance and equity prices”, Quarterly
Journal of Economics, Vol. 118 No. 1, pp. 107-15.
Gupta, P., Kennedy, D. and Weaver, S. (2005), “Corporate governance scores, Tobin’s Q and
equity prices: evidence from Canadian capital markets”, working paper, Lehigh
University, Bethlehem, PA.
Hausman, J. (1978), “Speci?cation tests in econometrics”, Econometrica, Vol. 46 No. 6, pp. 1251-71.
Ho, S. and Wong, K. (2001), “A study of the relationship between corporate governance
structures and the extent of voluntary disclosure”, Journal of International Accounting,
Auditing and Taxation, Vol. 10 No. 2, pp. 139-57.
Hope, O.-K. (2003), “Analyst following and the in?uence of disclosure components, IPOs and
ownership concentration”, Asia-Paci?c Journal of Accounting & Economics, Vol. 10 No. 2,
pp. 117-41.
Institutional Shareholder Services (2005), available at: www.issproxy.com
Khanna, T., Kogan, J. and Palepu, K. (2006), “Globalization and similarities in corporate
governance: a cross-country analysis”, Review of Economics and Statistics, Vol. 88 No. 1,
pp. 69-90.
Klapper, L. and Love, I. (2004), “Corporate governance, investor protection, and performance in
emerging markets”, Journal of Corporate Finance, Vol. 10 No. 5, pp. 703-28.
Klein, P., Shapiro, D. and Young, J. (2005), “Corporate governance, family ownership and ?rm
value: the Canadian evidence”, Corporate Governance: An International Review, Vol. 13
No. 6, pp. 769-84.
Kouwenberg, R. (2006), “Does voluntary corporate governance code adoption increase ?rm value
in emerging markets? Evidence from Thailand”, working paper, Mahidol University,
Bangkok.
Lang, M. and Lundholm, R. (1996), “Corporate disclosure policy and analyst behavior”,
The Accounting Review, Vol. 71 No. 4, pp. 467-93.
Lang, M., Lins, K. and Miller, D. (2003), “ADRs, analysts, and accuracy: does cross listing in the
United States improve a ?rm’s information environment and increase market value?”,
Journal of Accounting Research, Vol. 41 No. 2, pp. 317-45.
Lang, M., Lins, K. and Miller, D. (2004), “Concentrated control, analyst following and valuation:
do analysts matter most when investors are protected least?”, Journal of Accounting
Research, Vol. 42 No. 3, pp. 589-622.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A. and Vishny, R. (1997), “Legal determinants of
external ?nance”, Journal of Finance, Vol. 5 No. 3, pp. 1131-50.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A. and Vishny, R. (1998), “Law and ?nance”, Journal
of Political Economy, Vol. 106 No. 6, pp. 1113-55.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A. and Vishny, R. (2000), “Investor protection and
corporate governance”, Journal of Financial Economics, Vol. 58 No. 1, pp. 3-27.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A. and Vishny, R. (2002), “Investor protection and
corporate valuation”, Journal of Finance, Vol. 57 No. 3, pp. 1147-70.
Larcker, D., Richardson, S. and Tuna, I. (2007), “Corporate governance, accounting outcomes, and
organizational performance”, The Accounting Review, Vol. 82 No. 4, pp. 963-1008.
McNichols, M. and O’Brien, P. (1997), “Self-selection and analyst coverage”, Journal of
Accounting Research, Vol. 35 No. 2, pp. 167-99.
Analyst
following
89
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
Mitton, T. (2004), “Corporate governance and dividend policy in emerging markets”, Emerging
Markets Review, Vol. 5 No. 4, pp. 409-26.
O’Brien, P. and Bhushan, R. (1990), “Analyst following and institutional ownership”, Journal of
Accounting Research, Vol. 28 No. 3, pp. 55-76.
Peasnell, K., Pope, P. and Young, S. (2005), “Board monitoring and earnings management:
do outside directors in?uence abnormal accruals?”, Journal of Business Finance &
Accounting, Vol. 32 Nos 5/6, pp. 1311-46.
Roulstone, D. (2003), “Analyst following and market liquidity”, Contemporary Accounting
Research, Vol. 20 No. 3, pp. 552-78.
Shen, C. and Chih, H. (2007), “Earnings management and corporate governance in Asia’s
emerging markets”, Corporate Governance: An International Review, Vol. 15 No. 5,
pp. 999-1021.
Willekens, M., Bauwhede, H., Gaeremynck, A. and Gucht, L. (2005), “The impact of internal and
external governance mechanisms on the voluntary disclosure of ?nancial and non-?nancial
performance”, working paper, Aston Business School, Birmingham.
Xu, L. and Tang, A. (2008), “Internal control material weakness, analysts’ accuracy and bias, and
brokerage reputation”, working paper, Morgan State University, Baltimore, MD.
Further reading
Claessens, S. and Pan, J. (2002), “Corporate governance in Asia: a survey”, International Review of
Finance, Vol. 3 No. 1, pp. 71-103.
Wang, D. (2006), “Founding family ownership and earnings quality”, Journal of Accounting
Research, Vol. 44 No. 3, pp. 619-56.
Appendix. Abbreviated CLSA questionnaire
1. Discipline (15 percent)
(1) Has the company issued a “mission statement” that explicitly places a priority on good
CG? (. . .)?
(2) Is senior management incentivized to work towards a higher share price for the
company, e.g. (. . .) expected remuneration for the top executive(s) is tied to the value of
the shares?
(3) Does management stick to clearly de?ned core businesses? (Any diversi?cation into an
unrelated area in last three years would count as “No”.)
(4) [. . .] Is management’s view of its cost of equity within 10 percent of a CAPM-derived
estimate?
(5) [. . .] Is management’s estimate of its cost of capital within 10 percent of our estimate
based on its capital structure?
(6) Over the past ?ve years, is it true that the company has not issued equity, or warrants for
new equity, for acquisitions and/or ?nancing new projects where there was any
controversy over whether the acquisition/project was ?nancially sound? [. . .]
(7) Does senior management use debt for investments/capex only where ROA (or average
ROI) is clearly higher than cost of debt and where interest cover is no less than 2.5_? [. . .]
(8) Over the past ?ve years, is it true that the company has not built up cash levels [. . .]?
(9) Does the company’s Annual Report include a section devoted to the company’s
performance in implementing CG principles?
ARJ
23,1
90
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
2. Transparency (15 percent)
(10) Has management disclosed three- or ?ve-year ROA or ROE targets? [. . .]
(11) Does the company publish its Annual Report within four months of the end of the
?nancial year?
(12) Does the company publish/announce semiannual reports within two months of the end
of the half year?
(13) Does the company publish/announce quarterly reports within two months of the end of
the quarter?
(14) Has the public announcement of results been no longer than two working days of the
Board meeting? [. . .]
(15) Are the reports clear and informative? (Based on perception of analyst.) [. . .]
(16) Are accounts presented according to IGAAP? [. . .]
(17) Does the company consistently disclose major and market sensitive information
punctually? [. . .]
(18) Do analysts have good access to senior management? Good access implies accessibility
soon after results are announced and timely meetings where analysts are given all
relevant information and are not misled.
(19) Does the company have an English language web site where results and other
announcements are updated promptly (no later than one business day)?
3. Independence (15 percent)
(20) Is it true that there has been no controversy or questions raised over whether the board
and senior management have made decisions in the past ?ve years that bene?t them, at
the expense of shareholders? (Any loans to group companies/vs, non-core/non-con-
trolled group investments, would mean “No”).
(21) Is the chairman an independent, non-executive director?
(22) Does the company have an executive or management committee [. . .] which is
substantially different from members of the Board and not believed to be dominated by
major shareholders? (That is, no more than half are also board members and major
shareholder not perceived as dominating executive decision making).
(23) Does the company have an audit committee? Is it chaired by a perceived genuine
independent director?
(24) Does the company have a remuneration committee? Is it chaired by a perceived
genuine independent director?
(25) Does the company have a nominating committee? Is it chaired by a perceived genuine
independent director?
(26) Are the external auditors of the company in other respects seen to be completely
unrelated to the company?
(27) Does the board include no direct representatives of banks and other large creditors of
the company? (Having any representatives is a negative).
4. Accountability (15 percent)
(28) Are the board members and members of the executive/management committee
substantially different [. . .]? (i.e. no more than half of one committee sits on the other?)
Analyst
following
91
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
(29) Does the company have non-executive directors who are demonstrably and
unquestionably independent? (Independence of directors must be demonstrated by
either being appointed through nomination of non-major shareholders or having on
record voted on certain issues against the rest of the board. [. . .]
(30) Do independent, non-executive directors account for more than 50 percent of the board?
(31) Are there any foreign nationals on the board [. . .]?
(32) Are full Board meetings held at least once a quarter?
(33) Are board members well briefed before board meetings? [. . .] (Answers (33)-(35) must
be based on direct contact with an independent board member. If no access is provided
[. . .], answer “No” to each question).
(34) Does the audit committee nominate and conduct a proper review the work of external
auditors [. . .]?
(35) Does the audit committee supervise internal audit and accounting procedures [. . .]?
5. Responsibility (15 percent)
(36) If the board/senior management have made decisions in recent years seen to bene?t
them at the expense of shareholders (cf. question (20) above), has the company been
seen as acting effectively against individuals responsible and corrected such behavior
promptly, i.e. within six months? (If no such case, answer this question as “Yes”).
(37) [. . .] Over the past ?ve years, if there were ?agrant business failures or misdemeanors,
were the persons responsible appropriately and voluntarily punished? (If no cases [. . .],
then answer “No”).
(38) Is there any controversy or questions over whether the board and/or senior
management take measures to safeguard the interests of all and not just the dominant
shareholders? [. . .]
(39) Are there mechanisms to allow punishment of the executive/management committee in
the event of mismanagement [. . .]?
(40) Is it true that there have been no controversies/questions over whether the share
trading by board members have been fair, fully transparent, and well intentioned? [. . .]
(41) [. . .] Is the board small enough to be ef?cient and effective? (If more than 12,
answer “No”).
6. Fairness (15 percent)
(42) Is it true that there have not been any controversy or questions raised over any
decisions by senior management in the past ?ve years, where majority shareholders
are believed to have gained at the expense of minority shareholders?
(43) Do all equity holders have the right to call general meetings? [. . .]
(44) Are voting methods easily accessible (e.g. proxy voting)?
(45) Are all necessary [. . .] information for general meetings made available prior to general
meeting?
(46) Is senior management unquestionably seen as trying to ensure fair value is re?ected in
the market price of the stock [. . .]?
(47) Is it true that there has been no question or perceived controversy over whether
the company has issued depositary receipts that bene?ted primarily major
shareholders [. . .]?
(48) Does the majority shareholder group own less than 40 percent of the company?
ARJ
23,1
92
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
(49) Do foreign portfolio managers, and/or domestic portfolio investors who have a track
record in engaging management on CG issues, own at least 20 percent of the total
shares with voting rights?
(50) Does the head of Investor Relations report to either the CEO or a board member?
(51) [. . .] Over the past ?ve years, is it true that total directors remuneration has not
increased faster than net pro?t after exceptionals? [. . .]
7. Social awareness (10 percent)
(52) Does the company have an explicit (clearly worded) public policy statement that
emphasizes strict ethical behavior: that is, one that looks at the spirit and not just the
letter of the law?
(53) Does the company have a policy/culture that prohibits the employment of the
underaged [. . .]?
(54) Does the company have an explicit equal employment policy [. . .]?
(55) Does the Company adhere to speci?ed industry guidelines on sourcing of materials
[. . .]?
(56) Is the company explicitly environmentally conscious [. . .]?
(57) Is it true that the company has no investments operations in Myanmar [. . .]?
Sources: CLSA Emerging Markets (2001, 2002).
Corresponding author
Minna Yu can be contacted at: [email protected]
Analyst
following
93
To purchase reprints of this article please e-mail: [email protected]
Or visit our web site for further details: www.emeraldinsight.com/reprints
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
This article has been cited by:
1. Effiezal Aswadi Abdul Wahab, Anwar Allah Pitchay, Ruhani Ali. 2015. Culture, corporate governance
and analysts forecast in Malaysia. Asian Review of Accounting 23:3, 232-255. [Abstract] [Full Text] [PDF]
2. Sulaiman Mouselli, Khaled Hussainey. 2014. Corporate governance, analyst following and firm value.
Corporate Governance: The international journal of business in society 14:4, 453-466. [Abstract] [Full Text]
[PDF]
D
o
w
n
l
o
a
d
e
d
b
y
P
O
N
D
I
C
H
E
R
R
Y
U
N
I
V
E
R
S
I
T
Y
A
t
2
1
:
1
0
2
4
J
a
n
u
a
r
y
2
0
1
6
(
P
T
)
doc_932161142.pdf