Corporate Watchdogs

Navone, Marco A.; To, Thomas

Corporate Watchdogs

Financial Management, Forthcoming

43 Pages Posted: 12 Jun 2019

Marco A. Navone

Finance Discipline Group - UTS Business School; Bocconi University - CAREFIN - Centre for Applied Research in Finance; Financial Research Network (FIRN)

Thomas To

University of Sydney Business School

Date Written: May 26, 2019

Abstract

We investigate the role of financial analysts as corporate watchdogs. We show that firms that are subject to intense analyst monitoring are more likely to be investigated by the SEC or to be the subject of a securities class action. Using cross-sectional variations in managerial entrenchment we find that this effect is not a reflection of the "dark side of analyst coverage", analysts pushing executives to misbehave to exceed short-term expectations. We tackle the endogeneity of coverage decisions by using two instrumental variables and a quasi-natural experiment based on exogenous shocks to coverage due to mergers and closures of brokers.

Keywords: Financial Analysts, Litigation Risk, Managerial Misbehavior

JEL Classification: G14, G24, G34

Suggested Citation: Suggested Citation

Navone, Marco A. and To, Thomas, Corporate Watchdogs (May 26, 2019). Financial Management, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3394368