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CEO ownership, external governance, and risk-taking

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  • Kim, E. Han
  • Lu, Yao
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    Abstract

    This paper shows the relation between CEO ownership and firm valuation hinges critically on the strength of external governance (EG). The relation is hump-shaped when EG is weak, but is insignificant when EG is strong. The results imply that CEO ownership and EG are substitutes for mitigating agency problems when ownership is low. However, very high levels of share ownership can reduce firm value by entrenching the CEO and discouraging him from taking risk, unless mitigated by strong EG. We identify channels through which CEO ownership affects firm value by examining R&D, which is discretionary and risky. We find CEO ownership similarly exhibits a hump-shaped relation with R&D when EG is weak, but no relation when EG is strong. Our results are robust to endogeneity issues concerning CEO ownership and EG.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 102 (2011)
    Issue (Month): 2 ()
    Pages: 272-292

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    Handle: RePEc:eee:jfinec:v:102:y:2011:i:2:p:272-292

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    Web page: http://www.elsevier.com/locate/inca/505576

    Related research

    Keywords: Managerial share ownership; R&D; Product market competition; Institutional ownership concentration;

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    Cited by:
    1. Colonnello, Stefano & Curatola, Giuliano & Ngoc Giang Hoang, 2014. "Executive compensation structure and credit spreads," SAFE Working Paper Series 60, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    2. Waelchli, Urs & Zeller, Jonas, 2013. "Old captains at the helm: Chairman age and firm performance," Journal of Banking & Finance, Elsevier, vol. 37(5), pages 1612-1628.

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