MONITORING AND CORPORATE
DISCLOSURE: EVIDENCE FROM
A NATURAL EXPERIMENT
Rustom M. Irani, David Oesch (2013)
, MAIN IDEA
The paper shows that nancial analysts are not only information providers but also external monitors of
managers.
When rms exogenously lose analyst coverage due to brokerage mergers, the quality of nancial reporting declines, as
managers use more discretionary accruals.
Research Question 1
Does analyst coverage causally affect the quality of corporate disclosure?
In other words, if a rm loses analysts for external reasons, does its reporting become less transparent?
Research Question 2
Are analysts substitutes or complements to corporate governance?
That is, are analysts more important for rms with weak governance, where they may replace other monitoring mechanisms?
fi fi fi fi fi
, WHAT’S HAPPENED?
Between 1994 and 2005, several mergers of brokerage houses led to a reduction in analyst
coverage.
Before the merger, rms were often covered by analysts from multiple brokerage houses,
resulting in overlapping coverage.
After the merger, duplicated coverage disappears, and typically one analyst is dropped, reducing
the total number of analysts following the rm.
This creates an exogenous shock to monitoring.
fi fi
DISCLOSURE: EVIDENCE FROM
A NATURAL EXPERIMENT
Rustom M. Irani, David Oesch (2013)
, MAIN IDEA
The paper shows that nancial analysts are not only information providers but also external monitors of
managers.
When rms exogenously lose analyst coverage due to brokerage mergers, the quality of nancial reporting declines, as
managers use more discretionary accruals.
Research Question 1
Does analyst coverage causally affect the quality of corporate disclosure?
In other words, if a rm loses analysts for external reasons, does its reporting become less transparent?
Research Question 2
Are analysts substitutes or complements to corporate governance?
That is, are analysts more important for rms with weak governance, where they may replace other monitoring mechanisms?
fi fi fi fi fi
, WHAT’S HAPPENED?
Between 1994 and 2005, several mergers of brokerage houses led to a reduction in analyst
coverage.
Before the merger, rms were often covered by analysts from multiple brokerage houses,
resulting in overlapping coverage.
After the merger, duplicated coverage disappears, and typically one analyst is dropped, reducing
the total number of analysts following the rm.
This creates an exogenous shock to monitoring.
fi fi
