Analyst Coverage and Corporate Governance of French IPOs

Analyst Coverage and Corporate Governance of French IPOs

Benedicte Millet-Reyes
Copyright: © 2018 |Pages: 15
DOI: 10.4018/IJCFA.2018010102
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Analyst coverage has been associated with good corporate governance characteristics, especially in countries with weak investor protection. This hypothesis is tested for a sample of French IPOs covering the period 2004-2015. In theory, analysts can provide useful forecasts and recommendations for newly listed companies with a potential for asymmetric information. However, weak corporate governance practices may lead to their reluctance to provide coverage. Logistic regression results clearly indicate that financial analysts are more likely to follow IPOs with large institutional owners. However, this positive association disappears when French institutional shareholdings are combined with two-tier board structures and high debt levels, suggesting that analysts acknowledge the increased potential for inside monitoring and private information channels in these firms. In contrast, the impact of debt becomes positive when combined with foreign institutional ownership, indicating that analysts welcome foreign investors as promoters of good corporate governance practices.
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This empirical study investigates whether corporate governance mechanisms have an impact an on analyst coverage in France. The sample chosen for this study concentrates on French Initial Public Offerings during the period 2004-2015. First, French companies provide a unique set of corporate governance characteristics, with concentrated ownership structures and the ability to choose between a one-tier or two-tier board. Second, French firms often rely on long-term relationships with domestic banks providing equity, debt, and underwriting services. Migliorati and Vismara (2014) note that French IPOs are usually underwritten by French commercial banks, with BNP Paribas, Credit Mutuel, and Credit Agricole being the three largest ones.

The existing evidence on European IPOs concentrates mostly on the association between corporate governance quality and stock market performance, with limited findings provided on the role played by financial analysts. Corporate governance mechanisms have evolved rapidly in Europe in the past twenty years. After the Sarbanes-Oxley Act (SOX) was created in the United States, members of the European Union adopted similar corporate governance codes but also allowed stock exchange operators to create less regulated alternative markets. In their study of European IPOs, Akyol et al. (2014) find that national corporate governance codes have significantly improved market transparency in Europe. Blazy et al. (2012) report that all categories of stakeholders have benefited from better corporate governance mechanisms in France, and that this evolution counters the civil-law origins of the country.

This paper is structured as follows. The first two sections provide a literature review on the association between corporate governance mechanisms and analyst coverage. The next section concentrates on sample construction and descriptive statistics. The following three sections cover hypotheses development, model construction, and logistic regression results. The last section provides a conclusion and suggests future research topics generated by this study.

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