Determinants of managerial ownership and the link between ownership and performance; development of testable hypothesis
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Managerial ownership and firm performance are endogenously determined by exogenous (and only partly observed) changes in the firm’s contracting environment. To develop the testable hypothesis the extension of the cross-sectional results runed by Demesetz and Lehn (1985) (Journal of Political Economy, 93, 1155-1177) has been used and the panel data been used to show that managerial ownership is explained by key variables in the contracting environment in a way consistent with the predictions of principal-agent models. A large fraction of the cross-sectional variation in managerial ownership is explained by unobserved firm heterogeneity. Moreover, after controlling both for observed firm characteristics and firm fixed effects; it cannot be concluded (econometrically) that changes in managerial ownership agent firm performance.