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Managerial Equity Ownership and the Demand for Outside Directors

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  • Kenneth V. Peasnell
  • Peter F. Pope
  • Steven Young

Abstract

This paper examines the linkage between the use of outside directors and managerial ownership. We conjecture there are two linkages: the standard incentive‐alignment demand for monitoring when managers own little stock and an entrenchment‐amelioration demand when managerial stock ownership is high. As a consequence, we predict the association between managerial ownership and board composition will be nonlinear (U‐shaped if the entrenchment effect is sufficiently pronounced). Using UK data, we find that both quadratic and logarithmic models outperform the simple linear relationship assumed in prior research and that the substitution between managerial ownership and board composition is stronger than hitherto supposed.

Suggested Citation

  • Kenneth V. Peasnell & Peter F. Pope & Steven Young, 2003. "Managerial Equity Ownership and the Demand for Outside Directors," European Financial Management, European Financial Management Association, vol. 9(2), pages 231-250, June.
    • Handle: RePEc:bla:eufman:v:9:y:2003:i:2:p:231-250
    DOI: 10.1111/1468-036X.00217
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    References listed on IDEAS

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