Abstract
In this paper we appraise the monitoring activity of security analysis from the manager-shareholder conflict perspective. Using a data set of more than 7000 firm-year observations for manufacturing firms tracked by security analysts over the 1988-1994 period, our evidence supports the view that security analysis acts as a monitoring mechanism in reducing agency costs associated with the separation of ownership and control. However, we also find that security analysts are more effective in reducing managerial non-value maximizing behavior for single-focused than multi-segment (diversified) firms. In addition, the shareholder gains from the monitoring activity of security analysis are found to be larger for focused than for diversified firms.
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