حاکمیت شرکتی و رفتار تحلیلگر: شواهد از یک بازار در حال ظهور Corporate Governance and Analyst Behavior: Evidence from an Emerging Market

۱٫ Introduction Security analysts of brokerage houses frequently provide investors with buy, hold, or sell recommendations on the firms they cover. Their recommendations lead investors to reevaluate the firms, often resulting in significant changes in stock prices.1 While their reputation of providing reliable information is important, analysts have incentives to give favorable recommendations to help their brokerage firms generate more revenue.2 In fact, many studies have shown that analysts issue far more buy than sell recommendations and that analysts affiliated with firms’ Initial Public Offering (IPO) or Search Engine Optimization (SEO) underwriters tend to issue upward-bias recommendations, compared to those issued by unaffiliated analysts.3 The purpose of this study is to address a simple question: how would analysts recommend poorly governed firms to their clients in emerging markets where information asymmetry is high and shareholder rights are not well protected by legal systems? Tirole (2001) suggests that “a good governance structure is then one that selects the most able managers and makes them accountable to investors” (p. 3). La Porta et al. (2000) further note that “corporate governance is, to a large extent, a set of mechanisms through which outside investors protect themselves against expropriation by the insiders” (p. 4). Thus, intuitively, one expects that, ceteris paribus, analysts would give more favorable recommendations on firms with better corporate governance with which their clients could better assure themselves of a return on their investments (Shleifer and Vishny, 1997). However, this na€ıve expectation does not properly take into account analysts’ incentives. While the literature has recognized that analysts have incentives to issue positive recommendations on a firm that is an investment banking client or a potential client, we contend that analysts’ incentives to bias also depend on the firm’s corporate governance. Since poorly governed firms tend to be less transparent and more likely to manage earnings,4 managers of such firms would prefer investment bankers whose analysts could issue favorable recommendations to help camouflage their actions. Conversely, as we argue below, managers of firms with good corporate governance would prefer investment bankers whose analysts could provide more accurate information to their investors. As La Porta et al. (2000) point out, firms can generally obtain outside finance on better terms when insiders expropriate less and their private benefits of control diminish. Furthermore, La Porta et al. (2002) show that market valuation tends to be higher for firms with better protection of minority shareholders. And, Gompers et al. (2003) report that firms with stronger shareholder rights have higher firm value, higher profits, and higher sales growth. Thus, making managers accountable to investors and protecting minority shareholders is consistent with the principle of maximizing firm value. Given that analysts have incentives to access managers and to help their brokerage houses win investment banking deals, we propose a simple hypothesis to link a firm’s corporate governance to the behavior of analysts who cover the firm in an emerging market. Specifically, we posit that poor corporate governance reveals a firm’s preference for upward-bias recommendations, while good corporate governance reveals its preference for more honest opinions, and that analysts, particularly underwriting-affiliated analysts, are inclined to provide what the firm prefers. Both underwriting-affiliated and unaffiliated analysts have incentives to take into consideration what the firm prefers so that they can maintain or establish business relationships with the firm and hopefully win future underwriting deals (Bradshaw et al., 2006; Malmendier and Shanthikumar, 2007). Furthermore, analysts are afraid of being “frozen out” and not able to access managers for information in the future if they do not take into consideration what managers prefer.5 Underwriting-affiliated analysts have stronger incentives than unaffiliated ones to catering to managers’ needs since they have more to lose.6 In particular, Hong and Kubik (2003) show that, “for analysts who cover stocks underwritten by their houses, job separations depend less on accuracy and more on optimism” (p. 313). Furthermore, business relationships allow affiliated analysts to know more about managers’ preferences and their ways of doing business. Consequently, it is more difficult for underwriting-affiliated analysts to keep managers of (poorly governed) firms they cover at arm’s length. Thus, as previous studies have suggested, it is understandable that analysts have incentives to issue upward-bias recommendations. Our hypothesis further argues that, in emerging markets, poor corporate governance of recommended firms strengthens analysts’ incentives by inducing them to shift their balance more toward optimism because the corporate culture that tolerates managerial behavior with adverse selection and moral hazard problems tends to reveal managers’ preference for upward-bias recommendations; and, investment bankers would somehow pressure their analysts to deliver them. As Michaely and Womack (1999) point out, “there is implicit pressure on analysts to issue and maintain positive recommendations on a firm that is either an investment banking client or a potential client” (p. 654). For firms with good corporate governance, the set of mechanisms that protect outside investors make the firm more transparent and cause managers to be more conscious about, and careful to avoid, agency problems that may violate corporate governance rules. Consequently, managers of well-governed firms would be less likely to influence or pressure investment bankers for biased recommendations. This makes it easier for analysts to do their job of providing their clients with more timely reliable information on the firm, which in turn allows analysts to accumulate reputation capital. To test our hypothesis, we use a sample of 55 652 recommendations issued by analysts affiliated with brokerage houses in Taiwan on firms listed on the Taiwan Stock Exchange (TWSE). Since existing studies that examine the affiliated analyst bias largely use data from the US market, our data from an emerging market could provide a further test on the bias. Furthermore, in emerging markets with high information asymmetry, corporate governance could play a more critical role in mitigating agency problems.7 Thus, the effect of corporate governance on analyst behavior, if it exists, would be more profound and should be more easily detected using our data from an emerging market than it would be using data from the well-developed US market.8 Additionally, as in many emerging markets, most investors in Taiwan are retail investors (by value and number of trades),9 for whom analyst recommendations are important sources of information. Hence, given that retail investors are frequently misled by analysts,10 it is important to clarify the role of corporate governance in mitigating analyst bias. Indeed, we find that, holding other things constant: (i) analysts are more (less) likely to give buy (sell) recommendations on firms with poor corporate governance than on firms with good corporate governance; and that (ii) affiliated analysts give additional bias, which increases as recommended firms’ corporate governance decreases. Analyzing stock price reactions to analyst recommendations, we further find that while the market reacts positively when buy recommendations are announced, it puts discounts on buy recommendations on firms with poor corporate governance, and discounting is larger on underwriting-affiliated firms than it is on unaffiliated firms.11 Thus, consistent with our hypothesis, the data reveals that analyst recommendations on firms with poorer corporate governance contain more upward bias. Our findings imply that when a firm improves its corporate governance, analysts who cover the firm would be less inclined to bias their recommendations. Thus, while improving corporate governance can reduce agency problems within the firm, it also has an externality in moderating analyst bias. The remainder of our paper is organized as follows. Section 2 provides a review of the literature on analyst recommendations and on corporate governance, and then presents our hypothesis. Section 3 describes our data. Section 4 presents evidence of analyst bias and its relation with corporate governance. Section 5 investigates the discounts the market places on analyst bias. Section 6 addresses the question: which corporate governance mechanisms are effective in moderating analyst bias? Section 7 contains our concluding remarks.