The Dynamics of Managerial Ownership: Equilibrium Determinants

Good managers can give firms a competitive edge with respect to their industry rivals. This paper studies how shareholders design the structure of corporate ownership optimally - i.e., how they provide incentives - in order to exploit the competitive effect of managerial skills. A central assumption is that managerial skills, although identical ex-ante, evolve over time as managers build a track record, i.e. a history of successes or failures. Since it takes time to build up a successful track record, competition among firms is dynamic, in that laggards with relatively inexperienced managers must first catch-up with the leading edge managers before battling for leadership in the future. Ownership structures that optimally exploit dynamic competition imply an inverse relation between managerial ownership and, (i) across industries, the degree of symmetry of industry structure; (ii) within industry, firm position with respect to its peers. Empirical estimates for a large sample of U.S. executives over the 1993 to 2004 period provide strong support for these predictions.