Do analysts’ recommendations reflect co-opted boards?

• DOI: https://doi.org/10.1108/CG-10-2019-0310
• Pages: 1091-1103
• Date: 20 July 2020
• Published date: 20 July 2020
• Author: Suwongrat Papangkorn,Pattanaporn Chatjuthamard,Pornsit Jiraporn,Piyachart Phiromswad
• Subject Matter: Strategy,Corporate governance

Do analysts’recommendations reflect

co-opted boards?

Suwongrat Papangkorn, Pattanaporn Chatjuthamard, Pornsit Jiraporn and

Piyachart Phiromswad

Abstract

Purpose –This study aimsto examine whether co-opted directors influenceanalysts’ 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 a ppointed after the incumbent chief

executive officer assumes office. The authors investigate wh ether board co-option has an effect on

analyst recommendations.

Design/methodology/approach –The present study uses univariateanalysis, multi-variate regression

analysisand conduct a natural experiment usingthe 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/value –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 financialintermediaries, where analysts play a crucialrole in providing information to

the variousparticipants in financial markets.

Keywords Board independence, Corporate governance, Agency theory, Analyst,

Analyst recommendation, Co-opted boards

Paper type Research paper

1. Introduction

It is widely believed among regulators and scholars that the independent directors could

ensure effective corporate governance and board independence by monitoring the actions

of management and ensuring that management act of the best interest of the stockholders.

However, the empirical evidence supporting this belief has demonstrated little consistency

in results (for survey papers, Fields and Keys, 2003;John and Senbet, 1998;Korac-

Kakabadse et al.,2001

).

Several governance literatures show that the effect of board independence on firm

performance could vary according to board attributes and environment context (Ameer

et al., 2010;Wang et al.,2019;Fern

andez-Temprano and Tejerina-Gaite, 2020), while other

argues the real issue is linked to the individual matters beyond the requirements of

guidelines and codes of corporate governance (Isaac Mostovicz et al.,2010;Jang et al.,

2019;Luan and Tang, 2007). The board independence is about a state of mind (Leblanc,

2004, pp. 439-440). Van den Berghe and Baelden (2005) argue that the key to effective

board behavior is the director need to have the right attitude. Similarly, it previously

observed that the social connection between chief executive officer (CEO) and directors

could affect the directors’ ability to monitoring and disciplining the CEO (Coles et al., 2014;

(Informationabout the

authorscan be found at the

end of this article.)

JEL classification –G32, G34

Received 8 October 2019

Revised 7 February 2020

27 April 2020

20 June 2020

Accepted 21 June 2020

Funding: This research was

funded by Chulalongkorn

University under the

Ratchadapisek Sompoch

Endowment Fund (2020)

through the Collaborating

Center for Labor Research at

Chulalongkorn University (CU-

Collar) (763008) and the Center

of Excellence in Management

Research for Corporate

Governance and Behavioral

Finance. Part of this research

was carried out while Pornsit

Jiraporn served as Visiting

Professor of Finance at SASIN

School of Management,

Chulalongkorn University, in

Bangkok, Thailand.

DOI 10.1108/CG-10-2019-0310 VOL. 20 NO. 6 2020, pp. 1091-1103, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 1091