Governance Thresholds, Managerial Ownership and Corporate Performance: Evidence from the UK

Abstract

The paper examines the relationship between managerial share ownership and firm performance for British stock-exchange listed firms. We seek to establish a link between the predictions of agency theory and the corporate control environment using key governance and disclosure thresholds as determinants of the nonlinear relationship between managerial share ownership and performance. We also argue that the use of conventional accounting and market-based performance measures can be problematic in estimating managerial efficiency. The Clean Surplus Accounting Rate of Return is introduced as an alternative performance measure to Tobin’s Q and ROE.Our results indicate that relationships between managerial share ownership and corporate governance outcomes might be linked to key regulatory disclosure thresholds and minority shareholders rights of UK Company Law. We find that shareholder wealth is maximised when equity ownership by executive directors is below the 5% equity threshold of the Association of British Insurers’ dilution limit and sections 376 to 378 of Companies Act 1985 or above the 15% equity threshold of section 110 of Companies Act 1989 and section 127 of Companies Act 1985. Share ownership by executives between 5% and 15% is found to lead to declining firm performance.Our findings confirm the importance of testing thresholds based on corporate governance regulation rather than inductively deriving them from the data. We also show that it is desirable to decompose board ownership into executive and non-executive components. Our results further support the use of the Clean Surplus Accounting Rate of Return as an alternative performance variable.