Determinants of managerial ownership and the link between ownership and performance; development of testable hypothesis

Abstract

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.