Essays on financial markets and corporate governance
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My Ph.D. dissertation consists of two essays. The first essay, co-authored with my advisor Kee H. Chung, examines the relation between corporate governance and institutional ownership. Our empirical results show that the fraction of a company’s shares that are held by institutional investors increases with the quality of its governance structure. In a similar vein, we show that the proportion of institutions that hold a firm’s shares increases with its governance quality. Our results are robust to different estimation methods and alternative model specifications. These results are consistent with the conjecture that institutional investors gravitate to stocks of companies with good governance structure to meet fiduciary responsibility as well as to minimize monitoring and exit costs. The second essay investigates the relation between financial analysts and the relative informational efficiency of stock prices. This study documents both a bright side and a dark side of the impact of analysts on price efficiency. Using a panel data of U.S. stocks between 2002 and 2007, we show that stocks followed by analysts with higher forecast ability, analysts with more experience, and analysts who revise their forecasts more frequently have greater price efficiency after controlling for market liquidity, institutional holding, the number of analysts, and other stock characteristics. Using a sample of analyst coverage initiation events between 2002 and 2007, we find that the improvement of price efficiency around analyst coverage initiation events is greater if the coverage is initiated by an analyst who can provide accurate earnings forecasts for other companies. On the dark side, our panel regression results indicate that stocks followed by analysts who are more likely to issue optimistic predictions have lower price efficiency. The results also show that the presence of sophisticated investors can moderate the negative impact of analyst optimism on price efficiency. Overall, these results are consistent with the conjecture that analysts can facilitate efficient price formation, but may also hurt price efficiency if they issue optimistic forecasts.