How Do Powerful CEOs Affect Analyst Coverage?

Abstract

We examine how CEO power affects the extent of analyst coverage. CEO power can influence a CEO's incentives to disclose information. The amount of information disclosed by the CEO in turn influences the information environment, which affects financial analysts' incentives to follow the firm. Consistent with this notion, we show that firms with powerful CEOs are covered by fewer analysts. In addition, the evidence shows that firms with more powerful CEOs experience less information asymmetry. Powerful CEOs are well insulated and have fewer incentives to conceal information, resulting in more transparency. The information provided to investors directly by the firm substitutes for the information in the analyst's report. As a result, the demand for analyst coverage is lower. Our results are important because they show that CEO power affects important corporate outcomes such as corporate transparency and analyst following. © 2014 John Wiley & Sons Ltd.