Tobin’s q, managerial ownership, and analyst coverage: A nonlinear simultaneous equations model

Abstract

This paper estimates a simultaneous equations model with analyst coverage, managerial ownership and firm valuation jointly determined within the system. We argue that both managerial ownership (serving an internal monitoring function) and analyst coverage (serving an external monitoring function) enhance firm value, while managerial ownership and analyst coverage are substitutes in the monitoring of the firm. The empirical results based upon a nonlinear three-stage-least-square procedure lead to several interesting conclusions: First, we find a diminishing substitution effect between managerial ownership and analyst coverage and a decreasing marginal value for managerial ownership. Second, we find support for both an alignment effect and an entrenchment effect in the relationship between managerial ownership and Tobin’s Q after controlling for the effect of analyst coverage. Third, we find support for the argument that analyst coverage serves to enhance firm valuation after controlling for the effect of managerial ownership. Finally, we find that analyst coverage, managerial ownership and firm valuation are jointly determined. Keywords: Firm value; Managerial ownership; Analyst coverage JEL classification: G30; G32