Insider ownership and firm value in New Zealand

The relationship between insider stock ownership and firm value is examined for a sample of publicly traded companies in New Zealand. Results in this study confirm earlier findings of a curvilinear relationship reported for larger markets. Insider ownership and firm value are positively related for ownership levels below 14% and above 40% and inversely related at intermediate levels of ownership. These results are fairly robust to different measures of firm performance (Tobin's q, market to book ratio and return on equity) and to several different estimation techniques such as ordinary least squares, two stage least squares, seemingly unrelated regressions and fixed effects regressions on panel data over 1994–1998. Findings in this study contribute to the growing body of international evidence that the non-linear cubic relationship between insider ownership and firm value is robust to differences in governance structures across markets.     

Managerial ownership and firm valuation: Evidence from Japanese firms

We study the relation between managerial ownership and Tobin's q (Q) for 123 Japanese firms from 1987 to 1995. Managers in Japanese firms own a smaller stake in their firms relative to their US counterparts. Our initial analyses using an Ordinary Least Squares (OLS) regression model show a negative (positive) relation between Q and managerial ownership at low (high) levels of ownership. However, we argue that this finding is most likely a statistical artifact. When we control for firm fixed effects, suggested by recent literature, we reach a different conclusion. Specifically, we find that Q increases monotonically with managerial ownership. Our findings, therefore, suggest that as ownership increases, there is a greater alignment of managerial interests with those of stockholders. This conclusion remains when both managerial ownership and Q are treated as endogenous variables in a simultaneous equation system.     

Structural models and endogeneity in corporate finance: The link between managerial ownership and corporate performance

This paper presents a parsimonious, structural model that isolates primary economic determinants of the level and dispersion of managerial ownership, firm scale, and performance and the empirical associations among them. In particular, variation across firms and through time of estimated productivity parameters for physical assets and managerial input and corresponding variation in optimal compensation contract and firm size combine to deliver the well-known hump-shaped relation between Tobin's Q and managerial ownership. To assess the effectiveness of standard econometric approaches to the endogeneity problem, we apply those remedies to panel data generated from the model. The unfortunate conclusion is that, at least in the ownership-performance context, proxy variables, fixed effects, and instrumental variables do not generally provide reliable solutions to simultaneity bias.     

Top-Management Compensation and Capital Structure

The interrelationship between top-management compensation and the design and mix of external claims issued by a firm is studied. The optimal managerial compensation structures depend on not only the agency relationship between shareholders and management, but also the conflicts of interests which arise in the other contracting relationships for which the firm serves as a nexus. We analyze in detail the optimal management compensation for the cases when the external claims are (1) equity and risky debt, and (2) equity and convertible debt. In addition to the role of aligning managerial incentives with shareholder interests, managerial compensation in a levered firm also serves as a precommitment device to minimize the agency costs of debt. The optimal management compensation derived has low pay-performance sensitivity. With convertible debt, instead of straight debt, the corresponding optimal managerial compensation has high pay-to-performance sensitivity. A negative relationship between pay-performance sensitivity and leverage is derived. Our results provide a reconciliation of the puzzling evidence of Jensen and Murphy ( 1990 ) with agency theory. Other testable implications include (1) a relationship between the risk premium in corporate bond yields and top-management compensation structures, and (2) the announcement effect of adoption of executive stock option plans on bond prices. The model yields implications for management compensation in banks and Federal Deposit Insurance reform. Our results explain the dynamics of top-management compensation in firms going through financial distress and reorganization.     

The relationship between managerial ownership and firm performance in high R&D firms

Several studies have examined the relationship between managerial ownership and firm performance/value (e.g., [Journal of Financial Economics 20 (1988) 293; Journal of Financial Economics 27 (1990) 595; Journal of Corporate Finance 5 (1999) 79]). Using different samples, these studies provide general support for the argument that increases in managerial ownership create countervailing interest alignment and entrenchment effects, leading to a nonlinear relationship between managerial ownership and firm performance. However, the actual form of this nonlinear relationship differs across the studies.The present paper examines the relationship between managerial ownership and performance for high R&D firms that are listed on the NYSE, AMEX and NASDAQ. We find that Tobin's Q initially declines with managerial ownership, then increases, then declines again and, finally, increases again—a W-shaped relationship. The findings from our study point to the importance of industry effects in the relationship between managerial ownership and firm performance.     

Deviations from optimal CEO ownership and firm value

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.     

Managerial ownership dynamics and firm value

From 1988 to 2003, the average change in managerial ownership is significantly negative every year for American firms. We find that managers are more likely to significantly decrease their ownership when their firms are performing well and more likely to increase their ownership when their firms become financially constrained. When controlling for past stock returns, we find that large increases in managerial ownership increase Tobin's q. This result is driven by increases in shares held by officers, while increases in shares held by directors appear unrelated to changes in firm value. There is no evidence that large decreases in ownership have an adverse impact on firm value. We rely on the dynamics of the managerial ownership/firm value relation to mitigate concerns in the literature about the endogeneity of managerial ownership.     

On the relation between ownership structure and capital structure

The agency relationship between managers and shareholders has the potential to influence decision-making in the firm which in turn potentially impacts on firm characteristics such as value and leverage. Prior evidence has demonstrated an association between ownership structure and firm value. This paper extends the literature by examining a further link between ownership structure and capital structure. Using an agency framework, it is argued that the distribution of equity ownership among corporate managers and external blockholders may have a significant relation with leverage. The empirical results provide support for a positive relation between external blockholders and leverage, and non-linear relation between the level of managerial share ownership and leverage. The results also suggest that the relation between external block ownership and leverage varies across the level of managerial share ownership. These results are consistent with active monitoring by blockholders, and the effects of convergence-of-interests and management entrenchment.     

Changes in insider ownership and changes in the market value of the firm

The empirically-observed cross-sectional relation between the level of insider share ownership and the level of firm value has often been interpreted to mean that a change in share ownership can lead to a change in firm value. Such an interpretation has been criticized for ignoring potential endogeneity. In this paper, we perform two sets of tests to circumvent this alleged endogeneity. First, we measure changes in value over the 6-day interval around announcements of insider share purchases and find that the cross-sectional variability in changes in value is described by a curvilinear relation between firm value and insider ownership where the value of the firm first increases, then decreases, as insider share ownership increases. Second, we conduct tests to determine (1) whether the insider purchases are a response to changes in firm characteristics that require a new optimal equilibrium ownership level or (2) whether insiders are purchasing shares to signal that the firm is undervalued. We find no evidence to support these interpretations. Overall, our results are consistent with a causal interpretation of the empirical relation between insider ownership and firm value.     

Managerial hedging,equity ownership,and firm value

Suppose risk‐averse managers can hedge the aggregate component of their exposure to firm's cash‐flow risk by trading in financial markets but cannot hedge their firm‐specific exposure. This gives them incentives to pass up firm‐specific projects in favor of standard projects that contain greater aggregate risk. Such forms of moral hazard give rise to excessive aggregate risk in stock markets. In this context, optimal managerial contracts induce a relationship between managerial ownership and (i) aggregate risk in the firm's cash flows, as well as (ii) firm value. We show that this can help explain the shape of the empirically documented relationship between ownership and firm performance.     

Managerial ownership,board monitoring and firm performance in a family‐concentrated corporate environment

Using data from Hong Kong, a market that has family‐concentrated ownership structure, we examine the relation between managerial ownership, the board of directors and firm performance. We first conduct analysis on the managerial ownership and firm performance to derive the turning points where either ‘convergence of interest’ or ‘entrenchment’ effect of managerial ownership is dominant. Based on these estimated turning points, we find that at low and high level of ownership, effective board mitigates the entrenchment effect associated with managerial ownership; at medium level of ownership, board effectiveness is less demanded. These findings suggest that managerial ownership and board monitoring are substitutes in mitigating the agency problem between managers and shareholders. We also find that effective board curbs the excessive compensation by entrenched managers to themselves at low level of managerial ownership.     

So far away from me: Firm location and the managerial ownership effect on firm value

We examine the relation between CEO delta, firm locality, and firm value for a sample of 7749 firm-year observations. We find that CEO delta is more value-enhancing for rural firms, those associated with exacerbated agency conflicts resulting from decreased observability of managerial investment decisions and higher levels of information asymmetry. Further, the positive relation between CEO delta and firm value is stronger for rural firms with higher levels of information asymmetry or in less religious areas. Our findings imply that managerial ownership is more effective in mitigating agency conflicts in rural areas with higher levels of information asymmetry and lower degrees of local trustworthy constituents. Our results are robust to alternative definitions of urban/rural firms, the inclusion of additional control variables, and various tests controlling the endogeneity between firm location and value. Finally, the results do not appear to be driven by reverse causality.     

Managerial incentives and risk-taking

We provide empirical evidence of a strong causal relation between managerial compensation and investment policy, debt policy, and firm risk. Controlling for CEO pay-performance sensitivity (delta) and the feedback effects of firm policy and risk on the managerial compensation scheme, we find that higher sensitivity of CEO wealth to stock volatility (vega) implements riskier policy choices, including relatively more investment in R&D, less investment in PPE, more focus, and higher leverage. We also find that riskier policy choices generally lead to compensation structures with higher vega and lower delta. Stock-return volatility has a positive effect on both vega and delta.     

Product Market Competition,Managerial Incentives and Firm Valuation

This paper contributes to the very small empirical literature on the effects of competition on managerial incentive schemes. Based on a theoretical model that incorporates both strategic interaction between firms and a principal agent relationship, we analyse the relationship between product market competition, incentive schemes and firm valuation. The model predicts a nonlinear relationship between the intensity of product market competition and the strength of managerial incentives. We test the implications of our model empirically based on a unique and hand‐collected dataset comprising over 600 observations on 200 Swiss firms over the 2002–2005 period. Our results suggest that, consistent with the implications of our model, the relation between product market competition and managerial intensive schemes is convex indicating that above a certain level of intensity in product market competition, the marginal effect of competition on the strength of the incentive schemes increases in the level of competition. Moreover, competition is associated with lower firm values. These results are robust to accounting for a potential endogeneity of managerial incentives and firm value in a simultaneous equations framework.     

MANAGERIAL OWNERSHIP CHANGE AND FIRM VALUE: EVIDENCE FROM DUAL-CLASS RECAPITALIZATIONS AND INSIDER TRADING

We explore the relation between managerial ownership and firm value by examining a sample of firms that announce dual-class recapitalizations and the insider trading activity that precedes these announcements. Insider trading activity, unlike recapitalization, requires managers to commit their personal wealth and therefore serves as an indicator of the motivation behind the recapitalization. The recapitalization, in effect, allows managers to magnify the increase in vote ownership that results from insider buying and offsets the decrease in vote ownership that results from insider selling. This study adds to our understanding of dual-class recapitalizations by linking the wealth effects and changes in ownership concentration with ***manager-shareholder agency issues that follow from recapitalization and insider trading activity. Results show a positive relation between the change in firm value and ownership for recapitalizations before the 1984 New York Stock Exchange moratorium on delisting dual-class firms when ownership was high and control was firmly established. Results show a negative relation for recapitalizations since 1984 when ownership levels were lower and voting control was not assured. These results support the notion that more recent recapitalizations entrench managers.     

Helping hands or grabbing hands? An analysis of political connections and firm value

We construct a unique political connection index to capture variations in the strength of firm political relations in China. The index incorporates various channels through which a firm's executives, chairperson, directors, and other senior officers are politically connected with government officials and bureaucrats. Overall, there is a negative relation between our index and firm value for the full sample, but such negative relation mainly exists for state-owned enterprises (SOEs) and it becomes positive for non-SOEs. Furthermore, close examination shows an inverted U-shaped relation between political connections and firm value for the full sample in general and for non-SOEs in particular: Firm value increases initially at a lower level of connections and then begins to decrease at a higher level. The findings are consistent with the different business objectives and motivations of SOEs and non-SOEs in seeking political connections. Finally, our findings are robust after controlling for potential endogeneity and using an alternative headcount index construction method.     

Managerial ownership and firm performance: Evidence from China's privatizations

We examine the relationship between managerial ownership and firm performance for a sample of Chinese State-owned enterprises (SOEs) privatized over the period 1992-2000. The results indicate that managerial ownership has a positive effect on firm performance. Although return on assets (ROA) and return on sales (ROS) decline post-privatization, firms with high managerial ownership and, specially, high CEO ownership, exhibit a smaller performance decline. The difference is highly significant, with or without controlling for residual state ownership and changes in the firm's operating environment. We also find that the influence on firm performance becomes less significant at higher levels of CEO ownership. In contrast, performance continues to increase with managerial ownership. This finding suggests that, beyond a certain point, the distribution of shares would be more effective if extended to the whole management team instead of being limited to the chief executive.     

Family control,expropriation, and investor protection: A panel data analysis of Western European corporations

We investigate whether the value impact of family control in Western European firms depends on country-level investor protection. To this aim, we account for ownership–value nonlinearities. Supporting that the risk of expropriation increases with high ownership concentration, we find an inverted U-shape relation between family control and firm value. Family firms incur a value discount when family equity holdings exceed approximately 50%. The nonlinear effect of family control is attributable to family firms from a strongly protective environment. When investor protection is weak, family control has a positive impact on firm value regardless of the ownership concentration level.     

THE RISE IN MANAGERIAL STOCK OWNERSHIP

Despite the widespread view from Berle and Means onward that ownership of U.S. companies has become increasingly separated from managerial control, the authors report that managerial ownership of public corporations is markedly higher today than in 1935. Using a comprehensive sample of the 1,500 publicly traded firms in 1935 and a comparable sample of 4,200 firms in 1995, their study finds that managerial ownership increased from an average of 13% in 1935 to 21% in 1995. In terms of real (1995) dollar values, average managerial ownership increased from $18 million to $73 million over the same 60‐year period. One potential explanation for this increase is that greater reliance on managerial ownership has substituted for less reliance on other incentive alignment devices, such as pay‐for performance and the market for corporate control. The authors, however, report just the opposite. The use of such other corporate governance mechanisms has generally also increased over time, suggesting that the top managements of today's publicly traded corporations face greater pressure from investors and boards of directors than managements earlier in the century. An alternative explanation concern possible changes over time in the effects of certain company characteristics on the costs and benefits of using managerial ownership as a control device. While most of the characteristics the authors examined had the same relationship to managerial ownership in both periods, the role of volatility was different. In 1935, managerial ownership was inversely related to firm volatility; that is, higher volatility was associated with lower managerial ownership. In 1995, however, the relationship of managerial ownership to volatility was “nonlinear”; managerial ownership was positively related to firm volatility at low and moderate levels of volatility but the relationship turns negative when firm volatility is high. The overall lower level of volatility today, together with advances in capital markets and financial theory that have reduced the costs of hedging, appear to have reduced the costs of managers holding large stakes in their firms.     

Insider Ownership and Firm Value: Evidence from Real Estate Investment Trusts

Real estate investment trust (REIT) provides a unique laboratory to study the relation between insider ownership and firm value. One, a REIT has to satisfy special regulations which weaken alternative mechanisms to control agency problems. Empirically, I find a significant and robust nonlinear relation between Tobin's Q and REIT insider ownership that is consistent with the trade-off between the incentive alignment and the entrenchment effect of insider ownership. Two, many REITs are Umbrella Partnership REITs (UPREITs) which have dual ownership structure. They have both common shares and Operating Partnership Units (OP units). Property owners can contribute their properties to the UPREIT in exchange for OP units. Their capital gains taxes remain deferred as long as they hold onto their OP units and the UPREIT does not sell the properties they contributed. OP units owners are locked in with the firm and have incentive to monitor firm management, but their interests diverge from the common shareholders because their tax bases are much lower. Consistent with the trade-off between positive monitoring effect of OP units and tax-induced agency costs, I find that UPREIT's firm value increases with the fraction of OP units, but the effect is significantly weaker for the UPREITs where insiders hold OP units.