We use agency theory to explore how analyst coverage is influenced by managerial entrenchment associated with classified (or staggered) boards. The empirical evidence, based on nearly 2,000 firms across 15 years, suggests that firms with classified boards attract significantly larger analyst following. To cloak their efforts to expropriate from shareholders, opportunistic entrenched managers are motivated to disclose less information to outsiders. The resulting opaque information environment makes the information reported by analysts more useful to investors, hence more demand for analyst coverage. Our results show that the impact of staggered boards on analyst coverage exceeds, by three to six times, the effects of other corporate governance provisions. We also document the beneficial role of analyst coverage in improving firm value and reducing the costs of debt. Our results are consistent with the notion that analysts, as information intermediaries, provide oversight over management and thus help alleviate agency conflicts. The positive effect of analyst coverage, however, is severely reduced when the firm has a staggered board in place.
Keywords: board classification, staggered boards, classified boards, analyst following, analyst coverage, corporate governance, governance mechanisms
