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

53 Pages Posted: 6 Jan 2012  

Boochun Jung

University of Hawaii - School of Accountancy

Kevin Jialin Sun

St. John's University

Yanhua Sunny Yang

University of Connecticut - School of Business

Date Written: January 6, 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.

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

JEL Classification: M41

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: https://ssrn.com/abstract=1980523

Boochun Jung (Contact Author)

University of Hawaii - 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

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/

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