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Does analyst following restrain tunneling? Evidence from brokerage closures and mergers

•We examine the impact of analyst following on tunneling.•We use brokerage closures and mergers as an exogenous shock.•Tunneling increases for firms with reduced analyst following.•When a firm has severe agency problems, the effect is more salient.•When a firm faces a poor information environment, t...

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Bibliographic Details
Published in:Finance research letters 2021-07, Vol.41, p.101849, Article 101849
Main Authors: Gao, Kaijuan, Shen, Yiran, Chan, Kam C.
Format: Article
Language:English
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Summary:•We examine the impact of analyst following on tunneling.•We use brokerage closures and mergers as an exogenous shock.•Tunneling increases for firms with reduced analyst following.•When a firm has severe agency problems, the effect is more salient.•When a firm faces a poor information environment, the effect is more salient. We examine the impact of analyst following on tunneling using a sample of Chinese firms. Our findings suggest that, after brokerage closures and mergers, tunneling increases for firms with reduced analyst following. Additional analyses suggest that when a firm has severe agency problems (in terms of a large divergence of ownership and control or more related-party transactions) or a poor information environment (in terms of high earnings management), the impact of a reduction of analyst following on the increase in tunneling is more salient.
ISSN:1544-6123
1544-6131
DOI:10.1016/j.frl.2020.101849