Ownership Structure, Managerial Behavior and Corporate Value

7937 Words32 Pages
Journal of Corporate Finance 11 (2005) 645 – 660 www.elsevier.com/locate/econbase

Ownership structure, managerial behavior and corporate value
J.R. Daviesa, David Hillierb,T, Patrick McColganc a University of Strathclyde, UK b University of Leeds, UK c University of Aberdeen, UK

Received 21 November 2002; accepted 6 July 2004 Available online 20 April 2005

Abstract The nonlinear relationship between corporate value and managerial ownership is well documented. This has been attributed to the onset of managerial entrenchment, which results in a decrease of corporate value for increasing levels of managerial holdings. We propose a new structure for this relationship that accounts for the effect of conflicting managerial
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With equity holdings around 50%, managers will have implicit control of their company, but still do not have objectives completely aligned to external shareholders. Only at very high levels of managerial holdings are incentives akin to other shareholders. When this model is applied to a large sample of firms incorporated in the UK, managerial ownership is seen to have a significant impact on corporate value. This relationship is endogenous, and consistent with Cho (1998) and Himmelberg et al. (1999), corporate value has a corresponding effect on managerial holdings. We also find that although ownership levels are affected by firm level investment, there is no evidence of the reverse occurring. In the next section we outline our model of the managerial ownership–corporate value relationship. We present empirical results in Section 3 and conclude in Section 4.

2. The model In this section, we propose an alternative structure to the managerial holdings–corporate value relationship and argue that the cubic, or simpler representations, used in earlier

J.R. Davies et al. / Journal of Corporate Finance 11 (2005) 645–660


studies1 are unnecessarily restrictive and misspecified. The model that is presented here captures further nonlinearities in this relationship at high levels of managerial holdings and has a quintic specification.
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