Analyst Following, Group Affiliation, and Labor Investment Efficiency: Evidence from Korea

Round 1

Reviewer 1 Report

This research explores analysts' influence on corporate decisions, rather than their role in the stock market. The authors found that there is an increase in the labor investment efficiency of group firms when unaffiliated analysts' following increases. This result provides us the insight about the importance of independent analysts for corporate governance. However, if the author can discuss or provide more examples of other important decisions of the firms, such as significant investment in IT system, or firm restructuring...., this paper will be more perfect.

Author Response

Responses to Reviewer 1’s Comments on

 

“Analyst Following, Group-Affiliation, and Labor Investment Efficiency: Evidence from Korea”

 

Dear anonymous reviewer 1,

We would like to thank you for giving us the opportunity to revise and resubmit our paper, “Analyst Following, Group-Affiliation, and Labor Investment Efficiency: Evidence from Korea”.

 

We appreciate the time and details provided by you and have incorporated the suggested changes into the manuscript to the best of our ability. The manuscript has certainly benefited from these insightful revision suggestions. We look forward to working with you to move this manuscript closer to publication in the Sustainability.

 

We have responded specifically to each suggestion below. For your convenience, we include your comments in italics and present our responses to each comment. Moreover, we have marked the revised parts in red boxes in line with your comments in the revised draft.

Reviewer 1’s suggestion:

This research explores analysts' influence on corporate decisions, rather than their role in the stock market. The authors found that there is an increase in the labor investment efficiency of group firms when unaffiliated analysts' following increases. This result provides us the insight about the importance of independent analysts for corporate governance. However, if the author can discuss or provide more examples of other important decisions of the firms, such as significant investment in IT system, or firm restructuring...., this paper will be more perfect.

 

Response: Thank you very much for your constructive comments and thoughtful suggestions. Following your suggestion, we included anecdotal evidence in the introduction section (lines 38 ~ 45). The articles mentioned in the section provide examples of analysts who discuss restructuring plans of the Ford Motor Company, and those who voice their opinions on Occidental Petroleum’s acquisition. Furthermore, we added a paragraph to the conclusion section (lines 448 ~ 454), discussing future studies might examine the effect of analysts’ affiliation on the different types of corporate decisions. Chen, Harford and Lin (2015) showed that analysts’ governance role positively affect the firms that they follow, by documenting a decrease in the likelihood of make value-destroying acquisitions. Also, Oh and Kim (2018) examined the investment efficiency increases as there are more active analysts following the firm. Based on what we found in this paper, we believe unaffiliated analysts will provide better governance role in other corporate decisions, such as firm restructuring and investments in IT system. We added following references to the paper.

 

Additional references (in alphabetical order)

Bae, J.; Hur, W.; Lee, J.; Goh, J. Patent citations and financial analysts’ long-term growth forecasts. Sustainability 2017, 9, 5, 846.

Chun, H.M.; Shin, S.Y. Does analyst coverage enhance firms’ corporate social performance? Evidence from Korea. Sustainability 2018, 10, 7, 2561.

Goh, J.; Lee, J.; Hur, W.; Ju, Y. Do analysts fully reflect information in patents about future earnings? Sustainability 2019, 11, 10, 2869.

Hiller, J. Occidental to sell parts of Anadarko after debt-fueled acquisition. 2019, May 28. Available online: https://www.reuters.com/article/us-occidental-divestitures/occidental-to-sell-parts-of-anadarko-after-debt-fueled-acquisition-idUSKCN1SY0XW (accessed May 29, 2019)

Keitz, A.; Terrarosa, T. Ford CEO Jim Hackett's restructuring plans provoke skepticism as shares slide. 2018, July 26. Available online: https://www.thestreet.com/investing/ford-restructuring-plans-receives-mixed-reviews-14663958 (accessed May 29, 2019).

Oh, H.M.; Kim, W.Y. The effect of analyst coverage on the relationship between seasoned equity offerings and investment efficiency from Korea. Sustainability 2018, 10, 8, 2704.

Wang, K.; Jiang, W. Brand equity and firm sustainable performance: The mediating role of analysts’ recommendations. Sustainability 2019, 11, 4, 1086.

  

Adjustment: Please See New 5. Conclusion

Despite the importance of analysts’   independence, it has not been sufficiently emphasized as one of the virtues   of analysts. Prior studies have shown that affiliated analysts are more   likely to issue inaccurate earnings forecasts and biased recommendations.   This implies that analysts’ group affiliation lowers their independence, thus   decreasing the quality of information they provide to the market. In this   paper, we examined whether analysts’ group affiliation affects corporate   decisions, which go beyond earnings forecasts and stock recommendations. We studied the relationship between   analysts’ group affiliation and firms’ labor investment decisions. Analysts   respond to firms’ use of strategic staff planning, and they advance a view on   corporate employment decisions. Considering that companies listen to what   analysts say, it was expected that analyst following would influence the   efficiency of firms’ employment decisions. In this paper, we found that there   is an increase in labor investment efficiency of group firms when   unaffiliated analysts’ following increases. The results from further tests   showed that an increase in efficiency of labor investment is driven by   resolving the underinvestment problem, especially in decreasing firms’   over-firing problem. On the other hand, when analysts are affiliated with   firms they follow, their coverage does not affect firms’ labor investment   efficiency. Additional analyses prove that the positive association between   unaffiliated analyst coverage and labor investment efficiency becomes   stronger when there is high cashflow within firms. Our results are robust to   different model specifications as well. The relationship between analysts and   corporate decisions is well examined in the earlier literature. Researchers   found that corporate decisions affect both analysts’ coverage and the quality   of their forecasts and stock recommendations [25, 26, 27], while other   researchers also found that analysts affect various corporate decisions by   the firms they follow [10]. Although this paper focuses on analysts’ role in   firms’ employment investment decisions, future research can examine how   analysts’ independency improves the efficiency of other types of corporate   decisions, such as merge and acquisitions, firm restructuring, and   investments in IT system.

 

Author Response File: Author Response.docx

Reviewer 2 Report

I really appreciate the authors contribution to studying effects of analysts’ group affiliation on firms’ labor investment efficiency. The paper is written with adequate clarity which demonstrates the author’s knowledge in the field.

The paper structure respects the structure requested in research papers. The authors highlighted the new insights derived from the study compared with the existing studies. The methodology is well presented. The data are checked with robustness tests.

For all that, there are needed some improvements:

1.     The abstract presents the aim of the paper and the main results described in the manuscript, but I consider necessary to mention the analysis method.

2.     To descriptive statistics, rows 126-128, the authors should add a short interpretation of the data presented in Table 1.

3.     In the Section 3.3 Regression results, the authors should provide an interpretation of their results correlated with the cited literature.

4.     References are appropriate with the paper aim and research developed.

Author Response

Responses to Reviewer 2’s Comments on

 

“Analyst Following, Group-Affiliation, and Labor Investment Efficiency: Evidence from Korea”

 

Dear anonymous reviewer 2,

We would like to thank you for giving us the opportunity to revise and resubmit our paper, “Analyst Following, Group-Affiliation, and Labor Investment Efficiency: Evidence from Korea”.

 

We appreciate the time and details provided by you and have incorporated the suggested changes into the manuscript to the best of our ability. The manuscript has certainly benefited from these insightful revision suggestions. We look forward to working with you to move this manuscript closer to publication in the Sustainability.

 

We have responded specifically to each suggestion below. For your convenience, we include your comments in italics and present our responses to each comment. Moreover, we have marked the revised parts in red boxes in line with your comments in the revised draft.

 

Suggestion 1: I really appreciate the authors contribution to studying effects of analysts’ group affiliation on firms’ labor investment efficiency. The paper is written with adequate clarity which demonstrates the author’s knowledge in the field. The paper structure respects the structure requested in research papers. The authors highlighted the new insights derived from the study compared with the existing studies. The methodology is well presented. The data are checked with robustness tests. For all that, there are needed some improvements:
The abstract presents the aim of the paper and the main results described in the manuscript, but I consider necessary to mention the analysis method.

 

Response: Thank you very much for your constructive comments and thoughtful suggestions. We agree with your opinion that our abstract needs to mention the analysis method. As you recommended, we revise our abstract as follows:

 

Adjustment: Please See New Abstract:

This paper studies how analysts’ group affiliation   affects firms’ labor investment efficiency. Using a 2001-2017 sample of   Korean public companies, we find that labor investment efficiency increases   when there are more unaffiliated analysts following business group (chaebol)   firms. Our regression   results also suggest that an increase in labor   investment efficiency is attributed to a reduction in firms’ over-firing   problem. However, affiliated analysts are not found to influence firms’ labor   investment efficiency. We further document that the positive influence of   unaffiliated analysts on labor investment efficiency holds when firms have   high cash holdings. Our   results are robust to different specification of models, including two-stage   least square regression and firm-size matching.

 

Suggestion 2: To descriptive statistics, rows 126-128, the authors should add a short interpretation of the data presented in Table 1.

Response: This is a wonderful suggestion. Thanks to your feedback, we add a short interpretation of the data presented in Table 1 as follows:

 

Adjustment: Please see rows 198 ~ 203.

The   descriptive statistics for the variables used in regression Model (1) are   illustrated in Table 1, Panel A. The percentage change in employees, on   average (〖NET_HIRE〗_(i,t)), is 2.6%, indicating that sample firms   generally over-hire rather than over-fire employees. On average, the size of   our sample firms (SIZE_R), measured by a logarithm of market value of the   equity, is 0.5. The median values of sales growth rate (SALES_GROWTH) and ROA   are about 20% and 2%, respectively, indicating that sample firms are   profitable on average. However, both mean and median of change in ROA is   negative (-44% and -25%). Sample firms, on average, have a positive annual   stock return (RETURN), quick ratio (Quick), and debt ratio (LEV). Table 1,   Panel B presents results from regression Model (1). The model’s R-square   equals 8% and the F-statistics are 27.48. The coefficients of independent   variables indicate that an increase in sales growth rate, the current year’s   performance, stock returns and size, and last year’s quick ratio and change   in quick ratio increase firms’ employment. On the other hand, employment   decreases as changes in performance, changes in quick ratio, and last year’s   debt ratio increase. Firms’ net hiring decreases when the firm’s ROA is slightly   below zero, but the rest of the 〖LOSSBIN〗_(i,t-1) variables are not statistically significant.

  

Suggestion 3: In the Section 3.3 Regression results, the authors should provide an interpretation of their results correlated with the cited literature.

Response: I strongly agree with your idea of mentioning prior studies to interpret our findings. Following your suggestion, we try to provide an interpretation of their results correlated with the cited literature as follows:

 

Adjustment: Please see rows 269 ~ 271.

Using Model (2), we examined the   association between analysts’ group-affiliation and a firm’s abnormal net   hiring. The results are reported in Table 4. The regression result using a   full sample is shown in column (1). The coefficient of NGAGF is negative and   significant (-0.0019; p-value < 0.05), while the coefficients of GAGF,   GANGF, and NGANGF are insignificant. This result indicates that labor   investment efficiency increases in group firms (chaebols) as there are more   nongroup analysts following, but it is not affected by group-affiliated   analysts. Analysts’ independency, therefore, positively affects the   efficiency of firms’ labor investment decisions, in addition to its impact on   the quality of earnings forecasts found in prior studies [11, 13].   Coefficients on control variables suggest that abnormal net hiring decreases   when a firm paid dividends (DIVDUM) or had fewer tangible assets (TANGIBLE)   in the prior year. On the other hand, abnormal net hiring increases when a   firm had a loss (LOSS), more quick assets (Quick), or higher volatility in   net hiring (STD_NET_HIRE) in a prior year.

  

Suggestion 4: References are appropriate with the paper aim and research developed.

Response: In addition to a reference list in the earlier version of the paper, we additionally refer following papers:

 

Additional references (in alphabetical order)

Bae, J.; Hur, W.; Lee, J.; Goh, J. Patent citations and financial analysts’ long-term growth forecasts. Sustainability 2017, 9, 5, 846.

Biddle, G.C.; Hilary, G. Accounting quality and firm-level capital investment. The Accounting Review 2006, 81, 5, 963-982.

Cella, C. Institutional investors and corporate investment. Finance Research Letters 2019.

Chun, H.M.; Shin, S.Y. Does analyst coverage enhance firms’ corporate social performance? Evidence from Korea. Sustainability 2018, 10, 7, 2561.

Goh, J.; Lee, J.; Hur, W.; Ju, Y. Do analysts fully reflect information in patents about future earnings? Sustainability 2019, 11, 10, 2869.

Hiller, J. Occidental to sell parts of Anadarko after debt-fueled acquisition. 2019, May 28. Available online: https://www.reuters.com/article/us-occidental-divestitures/occidental-to-sell-parts-of-anadarko-after-debt-fueled-acquisition-idUSKCN1SY0XW (accessed May 29, 2019)

Keitz, A.; Terrarosa, T. Ford CEO Jim Hackett's restructuring plans provoke skepticism as shares slide. 2018, July 26. Available online: https://www.thestreet.com/investing/ford-restructuring-plans-receives-mixed-reviews-14663958 (accessed May 29, 2019).

Liu, M.; Wysocki, P. Cross-sectional determinants of information quality proxies and cost of capital measures. Quarterly Journal of Finance 2017, 7, 02, 1650016.

Oh, H.M.; Kim, W.Y. The effect of analyst coverage on the relationship between seasoned equity offerings and investment efficiency from Korea. Sustainability 2018, 10, 8, 2704.

Wang, K.; Jiang, W. Brand equity and firm sustainable performance: The mediating role of analysts’ recommendations. Sustainability 2019, 11, 4, 1086.

Xu, J.; Sim, J.W. Characteristics of corporate R&D investment in emerging markets: Evidence from manufacturing industry in China and South Korea. Sustainability 2018, 10, 9, 3002

 

Author Response File: Author Response.docx

Reviewer 3 Report

The paper analyses the effect of analyst affiliation on the efficiency of labour investment of firms.

I think that the paper is interesting although not very related with sustainability.

So, I would suggest to introduce in the analysis some aspects of sustainability, such as the effect on sustainability strategies and disclosing.

Furthermore, I recommend introducing a section about theoretical framework that supports the empirical analysis and justifies the use of the variables, as well as the independent variables of the models.

I also consider that the authors should improve the conclusions extending the analysis of the implications of the results.

Author Response

Responses to Reviewer 3’s Comments on

 

“Analyst Following, Group-Affiliation, and Labor Investment Efficiency: Evidence from Korea”

 

Dear anonymous reviewer 3,

We would like to thank you for giving us the opportunity to revise and resubmit our paper, “Analyst Following, Group-Affiliation, and Labor Investment Efficiency: Evidence from Korea”.

 

We appreciate the time and details provided by you and have incorporated the suggested changes into the manuscript to the best of our ability. The manuscript has certainly benefited from these insightful revision suggestions. We look forward to working with you to move this manuscript closer to publication in the Sustainability.

 

We have responded specifically to each suggestion below. For your convenience, we include your comments in italics and present our responses to each comment. Moreover, we have marked the revised parts in red boxes in line with your comments in the revised draft.

 

Suggestion 1: The paper analyses the effect of analyst affiliation on the efficiency of labour investment of firms.

I think that the paper is interesting although not very related with sustainability.

So, I would suggest to introduce in the analysis some aspects of sustainability, such as the effect on sustainability strategies and disclosing.

 

Response: Thank you very much for your constructive comments and thoughtful suggestions. We agree with your opinion that we need to address some aspects of sustainability. A paragraph is added to the introduction section that explains prior studies that examined a relationship between capital investment and firms’ sustainability. We believe this study provides insights on the effect of analysts on corporate sustainability.

 

Additional references (in alphabetical order)

Oh, H.; Kim, W. The effect of analyst coverage on the relationship between seasoned equity offerings and investment efficiency from Korea. Sustainability 2018, 10, 8, 2704.

Xu, J.; Sim, J.W. Characteristics of corporate R&D investment in emerging markets: Evidence from manufacturing industry in China and South Korea. Sustainability 2018, 10, 9, 3002.

 

Adjustment: Please see rows 53 ~ 61.

Labor investment as well as capital   investment is one of the most important corporate decisions which determines   a firm's sustainability. The effect of capital investment on firms’   sustainability has examined in prior studies. Xu and Sim noted that firms must   allocate their resources efficiently to achieve a sustainable performance.   Specifically, authors find that research and development (R&D) investment   has a positive effect on the future performance for both Chinese and Korean   firms [9]. Moreover, using unexpected levels of capital investment to measure   investment inefficiency, Oh and Kim found that a negative association between   seasoned equity offering (SEO) and investment efficiency disappears when   there are more active analysts. This result emphasizes the importance of   analysts on corporate sustainability [10].

  

Suggestion 2: Furthermore, I recommend introducing a section about theoretical framework that supports the empirical analysis and justifies the use of the variables, as well as the independent variables of the models.

Response: This is an excellent suggestion. In revised version, we refer to prior studies to provide a theoretical framework that can explain control variables in the main regression model as you suggested.

 

Additional references (in alphabetical order)

Biddle, G.C.; Hilary, G. Accounting quality and firm-level capital investment. The Accounting Review 2006, 81, 5, 963-982.

Cella, C. Institutional investors and corporate investment. Finance Research Letters 2019.

Liu, M.; Wysocki, P. Cross-sectional determinants of information quality proxies and cost of capital measures. Quarterly Journal of Finance 2017, 7, 02, 1650016.

 

Adjustment: Please see rows 188 ~ 198.

Eleven variables are used in the   regression to control for other factors that might affect firms’ employment   decisions [20, 21, 22, 23]. First, following Biddle and Hilary (2006), a   firm’s size (SIZE) and its financials, such as growth options (MTB), liquidity   (Quick), and dividend payout ratio (DIVDUM), are included in the regression   model. Also, we include control variables regarding a firm’s financial risk:   leverage (LEV), having losses (LOSS), and a tangible asset ratio (TANGIBLE).   Since Liu and Wysocki showed that volatilities in the cash flows and sales   revenue affect the association between accruals quality and cost of capital,   we use volatility in cash flows and sales revenue (STD_CFO, STD_SALE) as   control variables [22]. The model also includes institutional ownership   (INSTI) to control for corporate governance, as suggested by Cella (2019)   [23]. Lastly, volatility in net hiring (STD_NET_HIRE) is included in the   model to ensure that our results are not simply driven by investment   volatility.

 

Suggestion 3: I also consider that the authors should improve the conclusions extending the analysis of the implications of the results

Response: I wholeheartedly agree that providing implications of the results is important. Following your suggestion, we revise our conclusion to include the implications of the results. The revised version mentions that it will be interesting to examine the effect of analysts’ affiliation on the different types of corporate decisions in future research.

 

Adjustment: Please see rows 447 ~ 453.

The relationship between analysts   and corporate decisions is well examined in the earlier literature.   Researchers found that corporate decisions affect both analysts’ coverage and   the quality of their forecasts and stock recommendations [25, 26, 27], while   other researchers also found that analysts affect various corporate decisions   by the firms they follow [10]. Although this paper focuses on analysts’ role   in firms’ employment investment decisions, future research can examine how   analysts’ independency improves the efficiency of other types of corporate   decisions, such as merge and acquisitions, firm restructuring, and   investments in IT system.

 

Author Response File: Author Response.docx