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http://ssrn.com/abstract=1980523
 
 

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Do Financial Analysts Add Value by Facilitating More Effective Monitoring of Firms' Activities?


Boochun Jung


University of Hawaii at Manoa

Kevin Jialin Sun


St. John's University

Yanhua Sunny Yang


University of Connecticut

January 6, 2012

Journal of Accounting, Auditing and Finance, Vol. 27, No. 1, 2012

Abstract:     
Researchers argue that analysts’ information acquisition efforts increase firm value by facilitating monitoring of firms' activities and, thereby, reducing agency costs (e.g., Jensen and Meckling [1976]; Healy and Palepu [2001]). However, prior research provides limited and inconclusive empirical evidence to support this argument. This paper extends the literature by: examining the relation between analyst following and the value of firms' equity securities; and given a positive relation, whether that relation reflects effectively enhanced monitoring of firms' activities as a result of analysts' information acquisition efforts. We document a positive relation between analyst following and firms' asset values, and we find support for two hypotheses regarding the source of the increased asset values. First, the cash component drives the positive relation between analyst following and asset values. We interpret this evidence to imply a stronger monitoring effect for assets that are subject to higher agency costs or information asymmetry. Second, consistent with analyst following constraining asset mismanagement or motivating more efficient asset use, operating performance and total cash payout increase with analyst following. Overall, our results suggest that financial analysts facilitate more effective monitoring of firms' activities and, thereby, reduce agency costs and increase shareholder value.

Number of Pages in PDF File: 53

Keywords: stock analysts, cash holdings, agency costs, monitoring

JEL Classification: M41

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Date posted: January 6, 2012  

Suggested Citation

Jung, Boochun and Sun, Kevin Jialin and Yang, Yanhua Sunny, Do Financial Analysts Add Value by Facilitating More Effective Monitoring of Firms' Activities? (January 6, 2012). Journal of Accounting, Auditing and Finance, Vol. 27, No. 1, 2012. Available at SSRN: http://ssrn.com/abstract=1980523

Contact Information

Boochun Jung (Contact Author)
University of Hawaii at Manoa ( email )
College of Business Administration
Honolulu, HI 96822
United States
(808) 956-8461 (Phone)
Kevin Jialin Sun
St. John's University ( email )
8000 Utopia Parkway
Queens, NY 11439
United States
Yanhua Sunny Yang
University of Connecticut ( email )
2100 Hillside Rd, Unti 1041A
Storrs, CT 06238
United States
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