Why Are Analysts Less Likely to Follow Firms with High Managerial Ownership?

Prior research finding a negative relation between managerial ownership and analyst coverage argues that greater managerial ownership lessens the need for external monitoring by financial analysts due to fewer agency problems (Moyer, Chatfield, and Sisneros [1989]). Other research, based on foreign firms, argues that greater managerial ownership leads to entrenchment, and the negative relation with analyst following reflects analyst reluctance to follow firms with incentives to withhold information (Lang, Lins, and Miller [2004]). We further evaluate these two explanations by directly examining the link between ownership structure and a firm's disclosure environment. Using a sample of 25,855 U.S. firm-year observations from 1995 to 2006, we confirm a negative relation between managerial ownership and analyst coverage. We also find that managerial ownership is negatively related to the likelihood of management issuing earnings forecasts and find that this negative relation is most pronounced for firms with impending “bad news.” Furthermore, firms with higher managerial ownership release less accurate and more optimistic forecasts, particularly when faced with bad news. Overall, our results support the view that agency problems associated with greater managerial ownership contribute to less disclosure and a more opaque information environment, which discourage analyst following. We examine these two explanations from an investor perspective and find that the joint effect of greater managerial ownership and greater analyst coverage enhance firm value. This result is again inconsistent with the notion that greater managerial ownership reduces the need for analyst monitoring.