Assuming some fixed cost to information acquisition, diffuse shareholders in publicly held firms have little incentive to produce information that can substitute for the services of financial analysts. However, we argue that concentrated shareholdings, either by outsiders like institutions or by inside managers, reduce the demand for analyst services. The former group finds it worthwhile to produce its own information and avoid any moral hazard problems associated with analyst forecasts, while the concentration of shareholdings by insiders reduces the moral hazard problem associated with outside claimants (Jensen and Meckling 1976) and may work as an independent signal of quality (Leland and Pyle 1977). Earlier authors have provided evidence that the number of analysts following a firm is associated with the distribution of shareholdings between institutions, insiders, and other shareholders. In this paper we provide evidence that, after controlling for any average distributional effects, increased concentration of shareholdings by either insiders or outsiders (like institutions) is associated with lower analyst following. The results are robust to alternative measures of concentration and the definition of outside shareholders.
JEL classification: D82, G34
Key words: outside analysts, concentrated shareholdings, incentive problems
The authors thank the participants at the Georgia Institute of Technology seminar and the Atlanta Finance Workshop for helpful comments and suggestions. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.
Please address questions regarding content to Sanjiv Sabherwal, DuPree College of Management, Georgia Institute of Technology, Atlanta, Georgia 30332-0520, firstname.lastname@example.org; and Stephen D. Smith, Department of Finance, College of Business Administration, Georgia State University, Atlanta, Georgia 30303, and Research Department, Federal Reserve Bank of Atlanta, 404/651-1236, 404/651-2630 (fax), email@example.com.
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