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Concentrated shareholdings and the number of outside analysts

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  • Sanjiv Sabherwal
  • Stephen D. Smith

Abstract

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.

Suggested Citation

  • Sanjiv Sabherwal & Stephen D. Smith, 1999. "Concentrated shareholdings and the number of outside analysts," FRB Atlanta Working Paper 99-7, Federal Reserve Bank of Atlanta.
  • Handle: RePEc:fip:fedawp:99-7
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    Cited by:

    1. Pham, Peter K. & Kalev, Petko S. & Steen, Adam B., 2003. "Underpricing, stock allocation, ownership structure and post-listing liquidity of newly listed firms," Journal of Banking & Finance, Elsevier, vol. 27(5), pages 919-947, May.

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    Keywords

    Business enterprises ; Investments ; Stockholders;

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