Does Monitoring Effect Explain the Relation between Analyst Following and Firm Value?

45 Pages Posted: 19 Nov 2009

See all articles by Boochun Jung

Boochun Jung

University of Hawaii at Manoa - School of Accountancy

Kevin Jialin Sun

St. John's University

Yanhua Sunny Yang

University of Connecticut - School of Business; University of Connecticut - School of Business

Date Written: November 18, 2009

Abstract

Researchers argue that analysts’ information acquisition activities increase firm value through reducing agency costs, i.e., the monitoring effect (Jensen and Meckling 1976; Healy and Palepu 2001). However, the existing empirical evidence on analyst monitoring effect is limited and inconclusive. This paper extends the literature by examining 1) whether analyst following is related to higher firm value; and 2) if the relation is positive, whether the positive relation reflects analyst monitoring effect. We document a positive relation between analyst following and asset value and the positive relation is consistent with analyst monitoring effect as reflected in two aspects. First, the positive effect is significant for cash and much weaker for other assets. This is consistent with 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, analyst following is related to higher subsequent operating performance and total payout of cash.

Keywords: Stock analysts, Cash holdings, Monitoring

JEL Classification: M41

Suggested Citation

Jung, Boochun and Sun, Kevin Jialin and Yang, Yanhua Sunny and Yang, Yanhua Sunny, Does Monitoring Effect Explain the Relation between Analyst Following and Firm Value? (November 18, 2009). Available at SSRN: https://ssrn.com/abstract=1508605 or http://dx.doi.org/10.2139/ssrn.1508605

Boochun Jung

University of Hawaii at Manoa - School of Accountancy ( email )

College of Business Administration
Honolulu, HI 96822
United States

Kevin Jialin Sun

St. John's University ( email )

8000 Utopia Parkway
Queens, NY 11439
United States

Yanhua Sunny Yang (Contact Author)

University of Connecticut - School of Business ( email )

2100 Hillside Road
Storrs, CT 06269-1041
United States
8604864696 (Phone)
8604864838 (Fax)

HOME PAGE: http://www.business.uconn.edu/person/yanhua-sunny-yang/

University of Connecticut - School of Business ( email )

2100 Hillside Rd, Unti 1041A
Storrs, CT 06238
United States
8604864696 (Phone)

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