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Monitoring and corporate disclosure: Evidence from a natural experiment


Oesch, David; Irani, Rustom M (2013). Monitoring and corporate disclosure: Evidence from a natural experiment. Journal of Financial Economics, 109(2):398-418.

Abstract

Using an experimental design that exploits exogenous reductions in coverage resulting from brokerage house mergers, we find that a reduction in coverage causes a deterioration in financial reporting quality. The effect of coverage on disclosure is more pronounced for firms with weak shareholder rights, consistent with a substitution effect between analyst monitoring and other corporate governance mechanisms. The effects we uncover using our experimental design are an order of magnitude larger than estimates from ordinary least squares regressions that do not account for the endogeneity of coverage. Overall, our results suggest that security analysts monitor managers and entrenched managers adopt less informative disclosure policies in the absence of such scrutiny.

Abstract

Using an experimental design that exploits exogenous reductions in coverage resulting from brokerage house mergers, we find that a reduction in coverage causes a deterioration in financial reporting quality. The effect of coverage on disclosure is more pronounced for firms with weak shareholder rights, consistent with a substitution effect between analyst monitoring and other corporate governance mechanisms. The effects we uncover using our experimental design are an order of magnitude larger than estimates from ordinary least squares regressions that do not account for the endogeneity of coverage. Overall, our results suggest that security analysts monitor managers and entrenched managers adopt less informative disclosure policies in the absence of such scrutiny.

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19 citations in Web of Science®
19 citations in Scopus®
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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Business Administration
Dewey Decimal Classification:330 Economics
Language:English
Date:2013
Deposited On:30 Sep 2014 14:52
Last Modified:05 Apr 2016 18:23
Publisher:Elsevier
ISSN:0304-405X
Publisher DOI:https://doi.org/10.1016/j.jfineco.2013.02.021
Other Identification Number:merlin-id:10113

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