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Deviations from optimal CEO ownership and firm value

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  • Tong, Zhenxu
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    Abstract

    The transaction cost theory of managerial ownership and firm value predicts that deviations from optimal managerial ownership reduce firm value. This paper empirically tests the transaction cost theory by studying the relation between deviations on either side of optimal CEO ownership and firm value. We find that both above-optimal and below-optimal deviations reduce firm value. We find that a change in CEO ownership is associated with a higher (lower) abnormal return if it moves the ownership towards (away from) the optimal level. These findings are consistent with the transaction cost theory of managerial ownership and firm value.

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    File URL: http://www.sciencedirect.com/science/article/B6VCY-4SM1TCM-1/2/081e245064bedb29eeeee15c866f09d8
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 32 (2008)
    Issue (Month): 11 (November)
    Pages: 2462-2470

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    Handle: RePEc:eee:jbfina:v:32:y:2008:i:11:p:2462-2470

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

    Related research

    Keywords: CEO ownership Firm value Transaction cost theory;

    References

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    10. Charles P. Himmelberg & R. Glenn Hubbard & Darius Palia, 2000. "Understanding the Determinants of Managerial Ownership and the Link Between Ownership and Performance," NBER Working Papers 7209, National Bureau of Economic Research, Inc.
    11. Lins, Karl & McConnell, John J. & Servaes, Henri, 2004. "Changes in Equity Ownership and Changes in the Market Value of the Firm," CEPR Discussion Papers 4411, C.E.P.R. Discussion Papers.
    12. Mara Faccio & Ronald W. Masulis, 2005. "The Choice of Payment Method in European Mergers and Acquisitions," Journal of Finance, American Finance Association, vol. 60(3), pages 1345-1388, 06.
    13. Cheung, W.K. Adrian & Wei, K.C. John, 2006. "Insider ownership and corporate performance: Evidence from the adjustment cost approach," Journal of Corporate Finance, Elsevier, vol. 12(5), pages 906-925, December.
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    Citations

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    Cited by:
    1. Benson, Bradley W. & Davidson III, Wallace N., 2009. "Reexamining the managerial ownership effect on firm value," Journal of Corporate Finance, Elsevier, vol. 15(5), pages 573-586, December.
    2. Liang, Woan-lih, 2012. "Information content of repurchase signals: Tangible or intangible information?," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 261-274.
    3. Sonia Baños-Caballero & Pedro García-Teruel & Pedro Martínez-Solano, 2012. "How does working capital management affect the profitability of Spanish SMEs?," Small Business Economics, Springer, vol. 39(2), pages 517-529, September.
    4. Tong, Zhenxu, 2010. "Seasoned equity offerings, repurchases, and deviations from optimal CEO ownership," Finance Research Letters, Elsevier, vol. 7(1), pages 29-38, March.
    5. Grundy, Bruce D. & Li, Hui, 2010. "Investor sentiment, executive compensation, and corporate investment," Journal of Banking & Finance, Elsevier, vol. 34(10), pages 2439-2449, October.
    6. Cristina Martínez Sola & Pedro J. García-Teruel & Pedro Martínez Solano, 2012. "Trade credit policy and firm value," Working Papers. Serie EC 2012-01, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    7. Thapa, Priya Darshini Pun, 2013. "How does profitability get affected by working capital management in food and beverages industry?," MPRA Paper 50926, University Library of Munich, Germany.
    8. Bradley W. Benson & Wallace N. Davidson III & Hongxia Wang & Dan L. Worrell, 2011. "Deviations from Expected Stakeholder Management, Firm Value, and Corporate Governance," Financial Management, Financial Management Association International, vol. 40(1), pages 39-81, 03.
    9. Pathan, Shams & Skully, Michael, 2010. "Endogenously structured boards of directors in banks," Journal of Banking & Finance, Elsevier, vol. 34(7), pages 1590-1606, July.

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