Concentrated Shareholdings and the Number of Outside Analysts

FRB Atlanta Working Paper No. 99-7

26 Pages Posted: 11 May 2000

See all articles by Stephen D. Smith

Stephen D. Smith

(Deceased)

Sanjiv Sabherwal

University of Texas at Arlington - Department of Finance and Real Estate

Date Written: July 1999

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.

JEL Classification: D82, G34

Suggested Citation

Smith, Stephen Dewitt and Sabherwal, Sanjiv, Concentrated Shareholdings and the Number of Outside Analysts (July 1999). FRB Atlanta Working Paper No. 99-7. Available at SSRN: https://ssrn.com/abstract=188808 or http://dx.doi.org/10.2139/ssrn.188808

Sanjiv Sabherwal (Contact Author)

University of Texas at Arlington - Department of Finance and Real Estate ( email )

Box 19449 UTA
Arlington, TX 76019
United States
817-272-5520 (Phone)
817-272-2252 (Fax)

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