The Impact of Security Analysts' Monitoring and Marketing Functions on the Market Value of Firms

Abstract

In this study, we examine the impact of security analysts' monitoring and marketing functions on firms' market value. We postulate that security analysts' monitoring of corporate performance helps motivate managers, thus reducing the agency costs associated with the separation of ownership and control. We also argue that the information intermediary function provided by security analysts helps expand the breadth of investor cognizance. Consistent with these conjectures, this study finds that analyst following exerts a significant and positive impact on firms' market value. We also find evidence that security analysts have a stronger incentive to follow stocks of high-quality companies, since such stocks are easier to market. Hence, the security analysis activities appear to be determined, in part, by the marketing considerations of brokerage companies.

JEL Classification: G39