Corporate Governance Mechanisms and Financial Analysts Forecasts

Abstract

This paper addresses the issue of the relationship between financial analysts' forecasts and key governance mechanisms. We test the extent that the presence and structure of a firm's audit, remuneration and nomination committee affects both analysts' forecast errors and the dispersion of the errors. We argue that independent sub-committees are likely to reduce the management's incentive to adopt earnings management strategies that distort financial analysts' forecasts. After accounting for various control factors our initial results show that the presence of an audit, remuneration, and nomination committee reduces analysts forecast errors. We also find that independent audit, remuneration, and nomination committees lead to lower analyst forecast errors. The results suggest that the presence of the non-executive directors on the firm's sub-committees reduce dispersion in analysts' forecasts and therefore a firm's value trades nearer its fundamental value.

Keywords: Analysts Forecasts, Forecast Error, Corporate Governance, Dispersion, Independent Boards

JEL Classification: G2, G3, G34