Analyst Monitoring and Managerial Incentives

Abstract:     
In this paper, we investigate whether an increase in analyst monitoring, which improves the informational efficiency of stock prices, necessarily translates into firms' managers taking more value-enhancing decisions ("real efficiency"). We show that when the manager's compensation is tied to stock prices, then an increase in analyst monitoring weakens managerial incentives by making the firm's stock price less sensitive to the firm's current performance. If the manager's compensation contract is observed by stock market participants, then an increase in analyst monitoring is always detrimental to real efficiency. However, if market participants do not observe the manager's compensation contract, then an increase in analyst monitoring improves real efficiency for growth firms and reduces real efficiency for value firms.

Number of Pages in PDF File: 32

Keywords: Real efficiency, informational efficiency, analysts, pay-performance sensitivity

JEL Classification: G30, G31

working papers series