Security Analysis, Agency Costs, and Company Characteristics

John A. Doukas · Jeong‐Bon Kim · Christos Pantzalis

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Corporate Finance and Governance Financial Markets and Investment Strategies Auditing, Earnings Management, Governance

Abstract

We appraise the monitoring activity of security analysis from the perspective of the manager–shareholder conflict. Using a data set of more than 7,000 company-year observations for manufacturing companies tracked by security analysts over the 1988–94 period, we found that security analysis acts as a monitor to reduce the agency costs associated with the separation of ownership and control. We also found, however, that security analysts are more effective in reducing managerial non-value-maximizing behavior for single-segment than for multisegment companies. In addition, the shareholder gains from the monitoring activity of security analysis are larger for single-segment than for multisegment companies.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1986Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers 1987A Simple Model of Capital Market Equilibrium with Incomplete Information 1990Performance Pay and Top-Management Incentives 1990Additional evidence on equity ownership and corporate value 1990Managerial discretion and optimal financing policies 1995Diversification's effect on firm value 1981Risk Reduction as a Managerial Motive for Conglomerate Mergers

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