Can analyst coverage reduce the incidence of fraud? Evidence from China

Abstract

We investigate the impact of security analyst coverage on the incidence of corporate financial fraud in China. After controlling for the endogeneity between analyst following and fraud, we find that financial analyst coverage cannot significantly influence the incidence of fraud. The empirical findings suggest that financial analysts do not serve as external monitors to managers and large shareholders in China.

Keywords:

• security analyst
• analyst coverage
• fraud
• corporate governance
• China

JEL Classification:

• G34

Acknowledgements

We thank Professor K. C. John Wei, HKUST Business School, Professor Paul Miller, Curtin Business School and Associate Professor Chi-Chur Chao, Deakin Graduate School of Business for the helpful comments they have provided. All errors remain our own.

Notes

¹ The data on analyst following is incomplete before 2004.

² The same methodology of selecting the matched nonfraud firms was used by Aggarwal et al. (2013).

³ We have used TRADABLE, BOARDSIZE and AUDITOR both together and individually in the first stage regression to obtain the value of PFAC. The coefficients of PFAC are not statistically significant in the second stage regression. Due to the size limit, the tables of these results are not reported, but are available upon request.