Does Corporate Governance Quality Affect Analyst Coverage? Evidence from the Institutional Shareholder Services (ISS)
14 Pages Posted: 26 Jun 2014
Date Written: June 25, 2014
We examine the impact of corporate governance quality on the extent of analyst coverage. The evidence based on nearly 3,000 firms indicates that more analysts are likely to cover firms with weaker corporate governance. In particular, as corporate governance quality falls by one standard deviation, analyst following increases by 11.40%. Our evidence is consistent with the notion that poor governance results in a wider divergence between the stock’s market price and the fundamental value. Analysts prefer to cover companies with poor governance because it allows them to generate trading commissions by offering shareholders a particularly compelling story about why a stock’s fundamental value and the current price differ.
Keywords: Corporate governance, analyst following, analyst coverage, governance mechanisms
JEL Classification: G30, G34
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