Are All Analysts Created Equal? Industry Expertise and Monitoring Effectiveness of Financial Analysts
62 Pages Posted: 2 Nov 2014 Last revised: 1 Mar 2017
Date Written: January 17, 2017
We examine whether analysts’ prior industry experience influences their ability to serve as effective external firm monitors. Our analyses of firms’ financial disclosure quality, executive compensation and CEO turnover decisions portray a consistent picture that related pre-analyst industry experience is of critical importance for analysts to play an effective monitoring role. Coverage by analysts with such experience is associated with reduced earnings management, lower probability of committing financial misrepresentation, less CEO excess compensation, and higher performance sensitivity of CEO turnover. We also provide evidence on several plausible mechanisms through which industry expert analysts exert monitoring efforts and limit managerial opportunism.
Keywords: analysts; monitoring; governance
JEL Classification: G21
Suggested Citation: Suggested Citation