Where Corporate Governance and Financial Analysts Affect Valuation


  • *The authors thank Frederick Choi (the editor), an anonymous reviewer, Qi Chen (Duke) and inputs of participants in the annual and midyear meetings of the American Accounting Association. Data are obtained from Thomson Financial – IBES International Inc. and public sources identified in the paper. The authors gratefully acknowledge the support of the Division of Research & Graduate Studies at Kent State University and the National Natural Science Foundation of China (Research Project # 70632002, Fudan University, China). The authors also acknowledge Shimin Chen, Feng Liu, Jinhai Lu, for providing some B-share corporate governance and some other data.


We examine whether corporate governance and financial analysts affect accounting-based valuation models for B and H shares traded by foreign investors in China and Hong Kong, respectively. We expect that better corporate governance and more effective analyst activity mitigate potential adverse effects on accounting valuation models generated by country-specific problems in accounting, auditing, and legal systems. We find that valuation models perform better for companies with a greater analyst following, smaller forecast errors, relatively high public ownership and a strong board structure. Valuation models and accounting numbers have only limited explanatory power and valuation role for companies with weak governance and less effective analyst performance. The findings are robust across various market value, return, unexpected return, and other accounting valuation models. The results are consistent with less informed foreign investor clienteles searching for signals of more effective analyst activity and better corporate governance mechanisms.