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Reexamining the managerial ownership effect on firm value

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  • Benson, Bradley W.
  • Davidson III, Wallace N.
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    Abstract

    Whether equity-based compensation and equity ownership align the interests of managers with stockholders is an important question in finance. Early studies found an inverted U-shaped relation between managerial ownership and firm value, but later studies using firm fixed effects found no relation. Managerial ownership levels change very slowly over time which may mask an ownership effect on firm value when using a fixed effect model. This is due to a much smaller within firm variation than between firm variation. We demonstrate that using pay-performance semi-elasticity, rather than pay-performance sensitivity as a measure of managerial ownership incentives, results in meaningful variation within firm over time. The greater within firm variation increases the power to detect a relation between managerial ownership and firm value with fixed effect regressions. As in the early research on this issue, we find a significant inverted U-shaped relation between managerial ownership and Tobin's Q in fixed effects regressions and after controlling for endogeneity with both two-stage and three-stage least squares regressions. Our results are consistent with incentive alignment at low levels and risk aversion at high levels of managerial ownership.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Corporate Finance.

    Volume (Year): 15 (2009)
    Issue (Month): 5 (December)
    Pages: 573-586

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    Handle: RePEc:eee:corfin:v:15:y:2009:i:5:p:573-586

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    Web page: http://www.elsevier.com/locate/jcorpfin

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    Keywords: Executive compensation Managerial ownership Firm value;

    References

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    Cited by:
    1. Alderson, Michael J. & Bansal, Naresh & Betker, Brian L., 2014. "CEO turnover and the reduction of price sensitivity," Journal of Corporate Finance, Elsevier, vol. 25(C), pages 376-386.
    2. Thomas Poulsen, 2013. "Corporate control and underinvestment," Journal of Management and Governance, Springer, vol. 17(1), pages 131-155, February.
    3. Berezinets, Irina & Ilina, Yulia & Muravyev, Alexander, 2011. "CEO and Board Characteristics as Determinants of Private Benefits of Control: Evidence from the Russian Stock Exchange," IZA Discussion Papers 6256, Institute for the Study of Labor (IZA).
    4. Achleitner, Ann-Kristin & Kaserer, Christoph & Kauf, Tobias, 2012. "The dynamics of voting ownership in lone-founder, family-founder, and heir firms," Journal of Family Business Strategy, Elsevier, vol. 3(2), pages 79-96.

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