Analyst Coverage, Group Affiliation, and Cost Stickiness: Evidence from South Korea

초록

Manuscript type: Research paper Research aims: Financial analysts may improve corporate governance by monitoring corporate behaviour, but close relationships with firms may exacerbate agency costs. We examine these competing theories by investigating the impact of affiliated analysts' coverage on the cost stickiness of firms within the same group. Design/Methodology/Approach: We employ an empirical design using a sample of South Korean companies. We add four analyst coverage variables to the baseline cost stickiness equation from Anderson, Banker, and Janakiraman (2003), indicating whether the analyst is affiliated and whether affiliated analysts forecast firms affiliated within the same group. We compare results between when affiliated analysts forecast same-group-affiliated firms and when they do not. Research findings: Analyst coverage is negatively associated with cost stickiness. However, when affiliated analysts forecast same-group-affiliated firms, analyst coverage is positively associated with cost stickiness. Hence, analysts' monitoring role is ineffective when they forecast the same group of firms. This positive relationship is more pronounced when the chief executive officer's power is high. The findings are robust to endogeneity concerns. Theoretical contribution/Originality: Using a unique institutional setting in South Korea, we are able to investigate the effect of analysts' group affiliation on managers' cost management decisions. Our approach effectively separates the two competing theories of analyst coverage. Practitioner/Policy implication: The findings provide a better understanding of the complex links underlying analysts' monitoring role, short-term horizon, and conflicts of interest to market participants. Research limitation: We could not control for all factors that may influence the investigated relationship.

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