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Control or invest? Understanding the complex interests of managerial ownership


  • Shuching Chou
  • Chinshun Wu
  • Anlin Chen


Purpose - Conventional studies discuss the effect of managerial ownership on firm performance and have conflicting findings. This paper seeks to find divergent mutual effects existing between managerial ownership and firm performance. Design/methodology/approach - The three-stage-least squares method and simultaneous equation model is adopted to obtain more efficient coefficient estimation. Both firm-year observations and company mean variables are used to capture the structural relation and mutual effects between ownership structure and firm performance. Findings - This paper finds divergent mutual effects existing. In a diffused ownership structure, better firm performance may induce management to hold more stockholding. Management with mid-range of stockholdings has a positive effect on firm performance but not vice versa. For highly concentrated ownership structure, a negative mutual effect exists. Practical implications - These findings provide the investment purpose as an alternative explanation for insiders' stockholding that agrees with investors' risk aversion attitude in practice. For highly concentrated ownership, possible management entrenchment behavior resulting from dominant control power should be carefully considered and monitored to protect minority shareholders. Originality/value - This paper provides new evidence that complicated mutual effects may exist between managerial ownership and firm performance. It offers insights for both investors and researchers in corporate governance.

Suggested Citation

  • Shuching Chou & Chinshun Wu & Anlin Chen, 2007. "Control or invest? Understanding the complex interests of managerial ownership," Studies in Economics and Finance, Emerald Group Publishing, vol. 24(3), pages 188-206, August.
  • Handle: RePEc:eme:sefpps:v:24:y:2007:i:3:p:188-206

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    References listed on IDEAS

    1. Noe, Thomas H, 1997. "Insider Trading and the Problem of Corporate Agency," Journal of Law, Economics, and Organization, Oxford University Press, vol. 13(2), pages 287-318, October.
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    4. James Dow, 2003. "Informed Trading, Investment, and Welfare," The Journal of Business, University of Chicago Press, vol. 76(3), pages 439-454, July.
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    6. Hu, Jie & Noe, Thomas H., 2001. "Insider trading and managerial incentives," Journal of Banking & Finance, Elsevier, vol. 25(4), pages 681-716, April.
    7. Leonard J. Mirman & Neelam Jain, 2000. "Real and financial effects of insider trading with correlated signals," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 16(2), pages 333-353.
    8. Leland, Hayne E, 1992. "Insider Trading: Should It Be Prohibited?," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 859-887, August.
    9. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    10. Michael Manove, 1989. "The Harm from Insider Trading and Informed Speculation," The Quarterly Journal of Economics, Oxford University Press, vol. 104(4), pages 823-845.
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