Are All Analysts Created Equal? Industry Expertise and Monitoring Effectiveness of Financial Analysts

Abstract

We examine whether analysts’ prior industry experience influences their ability to serve as effective external firm monitors. Our analyses of firms’ financial disclosure quality, executive compensation and CEO turnover decisions portray a consistent picture that only analysts with related pre-analyst industry experience play an effective monitoring role. Their presence is associated with reduced earnings management, lower probability of committing financial misrepresentation, less CEO excess compensation, and higher performance sensitivity of CEO turnover. We also provide evidence on several plausible mechanisms through which industry expert analysts exert monitoring efforts and limit managerial opportunism.