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

Abstract

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 samegroup-
affiliated firms and when they do not.
Research findings: Analyst coverage is negatively associated with cost
stickiness. However, when affiliated analysts forecast same-groupaffiliated
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.