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    The Dyadic Ties of Managers and Financial Analysts and Their Externality on a Firm's Information Environment
    30 Jun 2016Working Paper Summaries

    The Dyadic Ties of Managers and Financial Analysts and Their Externality on a Firm's Information Environment

    by Zengquan Li, T.J. Wong, and Gwen Yu
    Research by Gwen Yu and colleagues examines whether firms use private networks with financial analysts to disclose information to the capital market. Using a sample of listed firms and financial analysts from 2005 to 2014 in China, the study shows that firms with connected analysts have higher quality consensus forecast. Also, when a connected analyst drops coverage of a firm, there is a decrease in the quality of the forecasts of other analysts following the firm. The finding suggests that in emerging markets, connected analysts can be a channel of information dissemination to the capital market.
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    Author Abstract

    When emerging market firms raise external capital, they face a tradeoff where greater transparency may lead to a lower cost of capital but at the cost of revealing proprietary information in their relational business practices. We find that firms overcome this challenge by relying on financial analysts within their private networks, who then transmit the information to arm’s length analysts outside the network. Specifically, we show that firms with more connected analysts have more accurate and informative firm-level consensus forecasts. Likewise, when a connected analyst drops coverage of a firm, there is a decrease in the accuracy and informativeness of the unconnected (arm’s length) analysts’ forecasts, suggesting that the connected analyst’s knowledge spills over to those outside the private network. The spillover effect is stronger when firms have plans to access external capital or rely heavily on non-arm’s length transactions. The findings suggest that managers’ private networks with financial analysts can have positive externalities for firms’ information environments.

    Paper Information

    • Full Working Paper Text
    • Working Paper Publication Date: June 2016
    • HBS Working Paper Number: 16-135
    • Faculty Unit(s): Accounting and Management
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