On the value relevance of analyst opinions and institutional shareholdings in China

• Pages: 206-225
• DOI: https://doi.org/10.1108/IJAIM-07-2015-0042
• Published date: 01 August 2016
• Date: 01 August 2016
• Author: Wei Huang,Agyenim Boateng
• Subject Matter: Accounting & Finance,Accounting/accountancy,Accounting methods/systems

On the value relevance of

analyst opinions and institutional

shareholdings in China

Wei Huang

Nottingham University Business School China, University of Nottingham

Ningbo China, Ningbo, China, and

Agyenim Boateng

Department of Law, Economics, Accountancy and Risk,

Glasgow Caledonian University, Glasgow, UK

Abstract

Purpose – This paper aims to examine the relevance of stock analysts’ opinions and institutional

investors’ shareholding to the value of Chinese rms.

Design/methodology/approach – The authors use both internal and external corporate governance

mechanism to investigate value relevance of analyst opinion and institutional shareholding to Chinese

rms.

Findings – The authors nd that Tobin’s Q is positively related to analysts’ consensus forecast

optimism and institutional investors’ shareholding but negatively related to analyst forecast

dispersions. Further analysis using subsamples of partially state-owned enterprises and

non-state-owned rms indicate that institutional investors have signicant impact on rm value for all

rms irrespective of the ownership type, whereas analyst forecasts opinions appear to have signicant

effects on partially state-owned rms but insignicant effects on non-state-owned rms. The results

also show that internal governance appears to be an important pre-requisite that affects analysts’

forecast opinions and that good internal governance reinforces external governance mechanism to

create rm value.

Originality/value – Studies analysing the effects of both internal and external mechanisms on rm

value in emerging economies are scant. This study attempts to extend and contribute to this line of

research by investigating the relevance of institutional investors and stock analysts’ opinion to rm

valuation.

Keywords China, Corporate governance, Firm value, Institutional investors, Analysts

Paper type Research paper

1. Introduction

The vast majority of studies in the corporate governance research have focused on how

the internal governance mechanisms such as board size and structure, ownership

structure, managerial opportunism, misalignment of objectives of managers and

stakeholders and distortions of managerial incentives affect rm value proxied by

Tobin’s Q ratio (Hu and Zhou, 2008;Chen et al., 2009;Conyon and He, 2011;Liu et al.,

2012). However, there has been increasing recognition that various entities in the

organization’s external environment such as equity analysts are considered important

JEL classication – G15, G32, G34

The current issue and full text archive of this journal is available on Emerald Insight at:

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IJAIM

24,3

206

Received 6 July 2015

Revised 21 August 2015

Accepted 31 August 2015

InternationalJournal of

Accountingand Information

Management

Vol.24 No. 3, 2016

pp.206-225

©Emerald Group Publishing Limited

1834-7649

DOI 10.1108/IJAIM-07-2015-0042

aspect of external corporate governance and play an important role as information

intermediaries (Bozec et al., 2010;Yu, 2011;Gotti et al., 2012;Hilary and Shen, 2013;Liu

and O’Farrell, 2013).

The role of analysts and institutional investors as external and internal governance

mechanisms respectively is particularly important in China due to the rudimentary level

of legal protection given to shareholders compared to western standards, the highly

concentrated nature of state ownership and weak corporate governance among

institutions (Firth et al., 2006;Yuan et al., 2009;Haß et al., 2014;Huang and Wright,

2015). By monitoring managerial actions and rm governance, nancial analysts and

institutional investors potentially mitigate managers’ self-serving behaviour, reduce

agency costs associated with the separation of ownership and control, minimize the

deleterious effect of the diffused nature of corporate ownership and improve rm value

(Jensen and Meckling, 1976;Shleifer and Vishny, 1997). Furthermore, stock analysts as

information intermediaries engage in information collections and process activities that

may reduce information asymmetry and subject managers’ behaviour to the stock

market scrutiny (Healy and Palepu, 2001;Yu, 2008;Ramnath et al., 2008). Huang et al.

(2015) noted that analysts are able to comprehend the differences in accounting choices.

According to Yu (2011), it is expected that analysts take into consideration the corporate

governance mechanisms when they set their recommendations because better-governed

companies are associated with less risk from management and have value improvement

potentials. Institutional investors improve rm value because they have both the ability

and the incentive to monitor and discipline corporate managers. Rose (2007) points out

that the effectiveness of institutional investors as a corporate governance tool is based

on the fact that institutional investors might discipline management because the

free-rider problem associated with dispersed ownership is alleviated.

While studies above provide reasons regarding the positive impact of either

institutional investors (internal governance) or analysts’ opinions (external governance)

on rm value, studies analysing the effects of both internal and external mechanisms on

rm value in emerging economies are scant. According to Cremers and Nair (2005)

whether rms with both strong internal and external governance mechanisms perform

differently from rms that have only one of these two mechanisms remains an empirical

question. For example, Hadlock and Lumer (1997) suggest that the effectiveness of

internal mechanisms depends on external control (complements), whereas Denis and

Kruse (2000) and Huson et al. (2001) suggest that effectiveness of internal monitoring is

independent of external control (substitutes). This study attempts to extend and

contribute to this line of research by investigating the relevance of institutional

investors and stock analysts’ opinion to rm valuation. However, we depart from

Cremers and Nair (2005) who used takeover vulnerability as a proxy for external

governance by using analysts’ forecast as a proxy for external governance. While

possible takeovers are usually considered an important aspect of external governance in

developed markets, this may not be the case in China where market for corporate control

is much less active. We believe analyst forecasts opinion appears more relevant as

external mechanism in China, given the relatively independent role played by these

analysts compared to state agencies charged with regulating competition and market

for corporate control.

The remainder of the paper is organized as follows: Section 2 presents the literature

and discusses the hypotheses of the study. Section 3 describes the data and outlines the

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Value

relevance of

analyst

opinions