The Role of Analyst Coverage on Earnings Management, Firm Outcomes, and Environmental, Social, and Governance (ESG) Performance

Abstract

The purpose of this thesis is to investigate the influence of analyst coverage on member countries of the Gulf Cooperation Council (GCC). The investigation includes earnings management, firm outcomes, and environmental, social, and governance (ESG) performance as dependent variables for the empirical studies. In addition, this thesis examines the moderating influence of political connections on the relationship between analyst coverage and those variables among GCC stock exchanges. This thesis contributes to the literature by providing empirical insights on various aspects of earnings management, firm outcomes and ESG performance in GCC countries. The first chapter presents the background of the economy and accounting information in the GCC region. Due to their focus on a more sustainable and diversified economy by moving away from a dependence on oil and gas, GCC countries are undergoing a pivotal phase of economic and social transformation. The chapter also provides the motivation for the empirical studies and summarises the findings and contributions to the existing literature. The second chapter presents a comprehensive literature review exploring analyst coverage across global markets. It discusses the methodology and findings, explains how analysts influence firm characteristics and decision-making, and identifies the factors that determine the extent of analyst coverage. The third chapter of this thesis, entitled “Analyst Coverage and Earnings Management”, aims to investigate the effect of analyst coverage on earnings management among GCC firms. The study also explores the relationship between analyst coverage and earnings management, taking into consideration the impact of the royal family in the region. This paper’s methodology employs panel data to investigate analyst coverage and its influence on two measures of earnings management decisions – accrual and real earnings management – as well as whether the royal family moderates the relationship between analyst coverage and earnings management. The analysis covers non-financial firms listed on six emerging capital markets in the GCC over a nine-year period from 2013 to 2021. The premise is that higher levels of analyst following can mitigate agency problems between shareholders and management by providing an information intermediary and ensuring interests are aligned. Based on 991 firm-year observations for non-financial firms listed on GCC stock exchanges, this study finds a negative relationship between analyst coverage, accruals and real earnings management. A more negative relationship between analyst coverage and earnings management is found in the extended analysis focusing on royal family affiliation. The results of tests of potential endogeneity bias remain consistent with the main findings. The fourth chapter of this thesis, entitled “Analyst Coverage and Firm Outcomes”, investigates how analyst coverage affects GCC firms. The findings reveal a significant association between analyst coverage and firm outcomes in GCC firms. It also explores how royal family affiliations affect this relationship in the region by using public non-financial firms listed in the GCC from 2013 to 2021, which constitutes a sample of 992 firm-year observations. The study finds that analyst following has a significant impact on firm outcomes. A higher level of analyst coverage of the firm leads to improved firm outcomes, which mitigates the agency problem between shareholders and management. This supports the argument that the role played by analysts is crucial to reducing information asymmetry. In addition, royal families positively (negatively) moderate the association between analyst coverage and firm outcomes. Furthermore, the findings remain robust after endogeneity tests. The fifth chapter of this thesis, entitled “Analyst Coverage and ESG Performance”, examines the relationship between analyst coverage and environmental, social, and governance (ESG) performance in GCC firms. Using a sample of public non-financial firms listed on GCC stock exchanges from 2012 to 2023, this study finds a significantly positive association between analyst coverage and ESG performance. Further, the findings indicate that analyst affiliation affects the relationship: international analysts exhibit a more pronounced positive relationship than other analysts. The results are qualitatively similar after controlling for endogeneity. Finally, the last chapter provides the conclusion to the thesis and outlines directions for future research.