Analyst Following, Corporate Governance And Valuation: Emerging-Market Evidence

Abstract

This paper considers analyst following as a substitute way of disciplining companies and examines the joint impact of corporate governance and analyst following on valuation in an emerging-market setting. I find that the interaction of analyst following and corporate governance on valuation is not significant for my whole sample. Breaking down the sample to common law versus code law countries indicates that, only for common law countries, the positive relation between the quality of corporate governance and valuation is weaker for companies with greater analyst following than for companies with lower analyst following. This paper joins the stream of research on the monitoring role of financial analysts. It extends Lang et al. (2004) by examining the joint impact of analyst following and corporate governance on valuation with a proxy of overall corporate governance quality. In addition, the finding from this paper suggests that analyst’s governance role is more pronounced in common law countries of emerging markets where analyst service is in greater need. The results have implications for investors, analysts and managers in the common law countries of emerging markets that firms with weak corporate governance benefit more from having a high level of analyst following in terms of market valuation.