Does corporate governance matter in competitive industries? Evidence from brokerage mergers and closures

Abstract

We document that firms in competitive industries experience significantly more deterioration in financial reporting quality after a reduction in analyst coverage due to brokerage closures or mergers, as compared to firms in noncompetitive industries. Most of the effects are mainly driven by firms with smaller initial analyst coverage, lower institutional ownership and greater financial constraints. Importantly, we further show that after brokerage exits, managerial slack increases more for firms in noncompetitive than competitive industries. Consistent with the notion that agency manifestation can take different forms, we provide evidence that competition may curtail some agency issues, such as managerial slack, while also exacerbating other agency issues, such as financial misreporting.

Department(s)

Finance, Economics and Risk Management

Document Type

Article

DOI

10.1111/jbfa.12797

Keywords

agency issues, analyst coverage, earning management, misreporting, product competition

Publication Date

10-1-2024

Journal Title

Journal of Business Finance and Accounting

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