The effect of analyst coverage on CEO compensation structure: evidence from the S & P 1500

Abstract

Purpose– What is the role of analysts in reducing agency problems and information asymmetry between stockholders and managers? The purpose of this paper is to confirm the analyst’s role by examining his or her influence on CEO compensation structure.Design/methodology/approach– The major population for this study consists of publicly traded corporations of the S & P 1500 for which data on CEO compensation is available from Standard & Poor’s Execucomp database, along with the proxy statements of these firms. Regression analysis is used to test hypotheses about the effect of analyst coverage on CEO compensation.Findings– The evidence shows that CEOs of firms with greater analyst coverage or higher analyst coverage quality (analyst coverage index) have higher pay-for-performance (Delta), more compensation incentives to increase firm risk (Vega), more total compensation, and more excess compensation. Even after controlling for the effect of other types of corporate governance, including internal governance and institutional holdings, analysts’ activities still have an incremental effect on CEO compensation structure.Practical implications– The authors findings may be useful to investors who use analyst coverage to evaluate the firm’s CEO compensation, as it suggests that investors may reference the information about analyst coverage of firms to craft appropriate CEO compensation structures.Originality/value– The authors results contribute by showing that the extra effect of analyst activities on CEO compensation structure exists, even after controlling for other types of governance mechanisms, such as internal governance and institutional investors’ holdings.