The Effect of Industry Concentration on the Association between Analyst Coverage and Information Asymmetry

Abstract

We examine whether analyst coverage affects the extent of information asymmetry in the Korean market. Also, we examine the influence of industry concentration on the relationship between analyst coverage and information asymmetry. In previous studies related to industry concentration, the efficiency and growth rate of firms are increased when industry concentration (competition in the industry) is low (high), and the moral hazard of managers is decreased, alleviating the agent problem between shareholders and managers. In this respect, it is expected that the higher the industry concentration, the greater the emphasis on analysts’ roles as information providers and intermediaries. Therefore, the influence of industry concentration on the relationship between analyst coverage and information asymmetry can be evaluated as an empirical problem. The empirical findings are as follows. First, analyst coverage shows significant negative (-) relationship with the volatility of daily stock returns (VOLA). Second, when industry concentration is high, the negative (-) relationship between analyst coverage and asymmetry of information is strengthened. In additional analysis, when the group is divided by the median of analyst coverage, information asymmetry is significantly decreased only in the group with high analyst coverage. This suggests that the influence of analyst coverage on information asymmetry may be differentiated between a group with high analyst coverage and a group with low analyst coverage. In addition, when the group is divided by the median of HHI, information asymmetry is significantly decreased only in the group with high HHI. By providing the empirical result that analysts improve the information environment, our results provide important implications for managers, investors, and regulators. In particular, our results will provide implications for regulatory