Managerial Ownership and Information Opacity

This study examines the effect of equity ownership by managers on a firm's information environment vis-agrave;-vis its effect on analyst forecast accuracy and analyst following. We collect a sample of over 26,000 observations on managerial ownership during 1988-2002 and find that managerial ownership is negatively related to both the accuracy of analysts' consensus earnings forecasts and analyst coverage. Interestingly, this negative relation is most pronounced for firms with impending quot;bad news.quot; We also find that firms with greater managerial ownership are less likely to issue a management earnings forecast, particularly in anticipation of bad news. Our results are consistent with the view that managerial entrenchment leads to information opacity, reducing forecast accuracy and discouraging analyst coverage. We further document a positive relation between analyst coverage and firm value, particularly for firms with greater managerial ownership and a relatively poor governance structure, suggesting that investors view analyst coverage as an alternative governance mechanism to mitigate managerial entrenchment. However, our evidence of reduced analyst following indicates that this monitoring activity appears to be lacking when it would be most beneficial