How Do Powerful CEOs Affect Analyst Coverage?
45 Pages Posted: 5 Apr 2012 Last revised: 29 Apr 2012
Date Written: April 4, 2012
We examine how CEO power affects the extent of analyst coverage. CEO power may influence the CEO’s incentives to disclose information. The amount of information disclosed by the firm in turn influences the information environment, which affects the financial analyst’s incentives to “cover” or “follow” the firm. Consistent with this notion, we show that firms with powerful CEOs are covered by fewer analysts. In addition, the evidence shows that firms with more powerful CEOs experience less information asymmetry. Powerful CEOs are well-insulated and have less incentives to conceal information, resulting in more transparency. The information provided to investors directly by the firm substitutes for the information in the analyst’s report. As a result, the demand for analyst coverage is lower. Our results are important as they show that CEO power matters to corporate outcomes, such as corporate transparency and analyst following.
Keywords: analyst coverage, analyst following, CEO power, agency theory, agency costs, agency conflicts
JEL Classification: G34, M41
Suggested Citation: Suggested Citation