Essays on the conflicts of interest of financial analysts and tax avoidance activities

Abstract

The thesis explores the conflicts of interest of financial analysts that come from the group-affiliation of security firm which an individual analyst works for and the effect of tax avoidance on capital structure. Chapter 2 examines whether group analysts’ research reports are more accurate than non-group analysts when they forecast the earnings of the member firms in the same group. Using a sample of Korean chaebol firms, I test two hypotheses: the group-locality and group-affiliation hypotheses. Our results show that the forecasts made by the group analysts are less accurate and more optimistic than those by the non-group analysts, supporting the group-affiliation hypothesis. Further, I find that the forecast accuracy of the group analysts is not related to the internal sales transaction ratio and that it increases with the precision of common information rather than idiosyncratic information - a further evidence inconsistent with the group-locality hypothesis. I also find that such inaccuracy and the optimism of the group analysts are associated with the group ownership incentive, which suggests the group-level propping motive. Finally, the results show that the inaccuracy and the optimism of the group analysts decrease with the analyst following and after the Regulation Fair Disclosure took effect, suggesting that the forecast bias of group analysts is related to the external information environment. Chapter 3 examines whether tax avoidance substitutes for the use of debt, and the role of the cost of debt and the tax-exhaustion effect in this relationship. Using the tax avoidance measure modified from Desai and Dharmapala (2006), I find the marginal substitution effect of tax avoidance for the use of debt for a large sample of Korean firms, generalizing the evidence of Graham and Tucker (2006). I further find that the debt-substitution effect of tax avoidance becomes stronger when the cost of debt is high, indicating that the cost of debt is a determina...