Monitoring and Corporate Disclosure: Evidence from a Natural Experiment

57 Pages Posted: 26 Nov 2014

See all articles by Rustom M. Irani

Rustom M. Irani

University of Illinois at Urbana-Champaign - Department of Finance; Centre for Economic Policy Research (CEPR)

David Oesch

University of Zurich

Date Written: October 10, 2011

Abstract

Using an experimental design that exploits exogenous reductions in coverage resulting from brokerage house mergers, we find that a reduction in coverage causes a deterioration in financial reporting quality. The effect of coverage on disclosure is more pronounced for firms with weak shareholder rights, consistent with a substitution effect between analyst monitoring and other corporate governance mechanisms. The effects we uncover using our experimental design are an order of magnitude larger than estimates from ordinary least squares regressions that do not account for the endogeneity of coverage. Overall, our results suggest that security analysts monitor managers and entrenched managers adopt less informative disclosure policies in the absence of such scrutiny.

Keywords: Analyst coverage; Corporate governance; Reporting decisions

JEL Classification: D82; G24; G30; G34; M40

Suggested Citation

Irani, Rustom M. and Oesch, David, Monitoring and Corporate Disclosure: Evidence from a Natural Experiment (October 10, 2011). Journal of Financial Economics (JFE), Vol. 109, No. 2, 2013. Available at SSRN: https://ssrn.com/abstract=2530630

Rustom M. Irani (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

College of Business
1206 South Sixth Street
Champaign, IL 61820
United States

HOME PAGE: http://rirani.web.illinois.edu

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

David Oesch

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

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