Do Analysts’ Recommendations Reflect Co-Opted Boards?

Abstract

Purpose: This study examines whether co-opted directors influence analysts’ recommendations. As information intermediaries, financial analysts should incorporate the quality of corporate governance into their valuation because well-governed firms are associated with lower agency costs and better performance. Co-opted directors are those appointed after the incumbent CEO assumes office. Design/methodology/approach: The present study uses univariate analysis, multi-variate regression analysis, as well as conduct a natural experiment using the Sarbanes-Oxley as an exogenous shock. Findings: The results show that firms with fewer co-opted directors tend to receive more favorable recommendations, suggesting that analysts favor firms with strong corporate governance. The results hold even after controlling for various firm characteristics, including the traditional measures of board quality, i.e. board size and independent directors. Originality: The paper is the first of its kind and offers evidence on the effect of co-opted directors on analyst recommendations. The results contribute to the literature both in corporate governance and in financial intermediaries, where analysts play a crucial role in providing information to the various participants in financial markets.