Firm-specific corporate governance and analysts’ earnings forecast characteristics: Evidence from Asian stock markets

Abstract

Purpose: The purpose of this paper is to examine the impact of corporate governance on the capital market participants’ abilities to forecast future performance, as measured by the properties of analysts’ earnings forecasts in Asian stock markets. Design/methodology/approach: This paper hypothesizes that higher corporate governance is associated with lower forecast errors, lower forecast dispersion and lower forecast revision volatility. Findings: These predictions are supported with a sample of companies across eleven Asian economies over 2004-2012. The results of this paper suggest that corporate governance plays a significant role in the predictability of firm’s future performance and, therefore, improves the financial environment in Asian stock markets. Furthermore, the impact of corporate governance on analysts’ forecast properties is more pronounced in countries with strong investor protection. Research/limitations/implications: The authors acknowledge the following limitations of this paper. First, the results of this paper may be subject to omitted-variable bias and endogeneity issue. The authors have used control variables in the regressions to reduce the omitted variable bias. The authors have run lead-lag regressions to address causality issue. Second, CLSA corporate governance scores are collected for largest companies in each jurisdiction. Therefore, the sample is biased towards the largest companies in those jurisdictions and may not be representative of the average firm in the Asia. Originality/value: The results of this paper speak to the benefit of having strong corporate governance in terms of reducing the information asymmetry between investors and corporate management.