The Relationship between Analyst Coverage and Overinvestment, and the Mediating Role of Corporate Governance. Evidence From China

Chia-Hsien Tang, Yen-Hsien Lee, Wan-Zhu Lu and Li Wei

Journal of Behavioral Finance, 2023, vol. 24, issue 4, 495-510

Abstract: This study applied a quantile analysis to test the relationship between analyst coverage and overinvestment in Chinese firms and further sought to demonstrate the mediating effect of corporate governance on overinvestment. The empirical results show that analyst coverage causes overinvestment across all quantiles; however, corporate governance can diminish the effect of firm overinvestment in the higher quantile analysis. Additionally, the difference-in-differences method was used to explore the effectiveness of the Chinese government’s 2013 corporate governance reform, with the results confirming that that governance reform has been effective in inhibiting a firm’s overinvestment. The findings of this study indicate that analysts act as market supervisors in the Chinese capital market, improving corporate governance; however, their coverage does not appear to benefit firms or shareholders. This research highlights the need to review the role of analysts in the market to ensure they can reduce information asymmetry between managers and shareholders without causing overinvestment behavior.

Date: 2023
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DOI: 10.1080/15427560.2022.2037601

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