Concentrated Control, Analyst Following and Valuation: Do Analysts Matter Most When Investors are Protected Least?

This paper uses a sample of over 2,500 firms from 27 countries to investigate the relation between ownership structure, analyst following, investor protection and valuation. We find that analysts are less likely to follow firms with potential incentives to withhold or manipulate information, such as when the Family/Management group is the largest control rights blockholder. Further, this relation is stronger for firms from low shareholder protection countries. Using valuation regressions that take into account potential endogeneity between analyst following and firm value, we find a positive valuation effect when analysts cover firms that have both potentially poor internal governance and weak country-level external governance. Overall, our findings suggest that corporate governance plays an important role in analysts’ willingness to follow firms and that increased analyst following is associated with higher valuations, particularly for firms likely to face governance problems. • Email addresses for the authors are langm@bschool.unc.edu, finkvl@business.utah.edu, damiller@indiana.edu. We thank Richard Leftwich (the editor) and an anonymous referee for detailed suggestions on improving the paper. We also thank Yiorgos Allayannis, Amy Dittmar, William Goetzmann, Rebecca Hahn, Ole-Kristian Hope, Mike Lemmon, Yvonne Lu, Marlene Plumlee, Dan Rogers and seminar participants at McGill University, Swedish School of Economics, University of Arizona, University of Oregon, University of Southern California, University of Utah, and University of Virginia (Darden) and for helpful comments. Laura Knudson, Alan Montgomery, and Ugur Lel provided valuable research assistance. We are grateful for analyst forecast information provided by I/B/E/S Inc. and ownership data from Mara Faccio and Larry Lang. Miller acknowledges financial support from a DaimlerChrysler Faculty Fellowship. A previous version of the paper was entitled “Do analysts matter most when investors are protected least? International evidence.”