Publications
Publications
- 2016
- HBS Working Paper Series
Private Networks of Managers and Financial Analysts and Their Externality on a Firm's Information Environment
By: Zengquan Li, T.J. Wong and Gwen Yu
Abstract
When emerging market firms raise external capital, they face a tradeoff where greater transparency may lead to a lower cost of capital but at the cost of revealing proprietary information in their relational business practices. We find that firms overcome this challenge by relying on financial analysts within their private networks, who then transmit the information to arm’s length analysts outside the network. Specifically, we show that firms with more connected analysts have more accurate consensus forecasts and lower forecast dispersion. When a connected analyst departs and stops covering a firm, there is a decrease in the accuracy and informativeness of the unconnected (arm’s length) analysts’ forecasts, suggesting that the connected analyst’s knowledge spills over to those outside the private network. The spillover effect is stronger when firms have plans to access external capital or when the firms possess information that is proprietary or hard to verify (e.g., in times of political uncertainty). The findings suggest that managers’ private networks with financial analysts can have positive externalities for firms’ information environments.
Keywords
Emerging Market; Financial Analysts; Information; Emerging Markets; Forecasting and Prediction; Corporate Governance
Citation
Li, Zengquan, T.J. Wong, and Gwen Yu. "Private Networks of Managers and Financial Analysts and Their Externality on a Firm's Information Environment." Harvard Business School Working Paper, No. 16-135, June 2016. (Revised October 2016.)