Abstract
Agency theory predicts that managerial ownership reduces agency cost and increases firm value. However, empirical evidence on the ownership and firm value relation is, at best, mixed. To date, there is no evidence on how exactly managerial ownership affects firm value and through what channel ownership improves value. Our paper fills in the void in the literature by addressing these issues. As a firm’s operating efficiency is an important indicator of its managerial performance, we uses changes in managerial ownership as an argument to evaluate changes in firm value and hypothesizes that changes in managerial ownership affect firm’s operating efficiency, which in turn drives firm value. Using a large panel data set (4,451 observations for 1,162 firms for year 1990-2001), we find significantly positive relation between changes in managerial ownership, operating efficiency and changes in firm value. Larger increase in managerial ownership provides greater alignment of managerial interests with those of shareholders, hence greater improvement in firm value. However, this relation is not monotonic. The positive impact on firm’s value increases at a decreasing rate. Our simultaneous equation tests remove the endogeneity concern between managerial ownership and firm value.
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