Management Ownership vs. Management Control – Complementary Factors of Agency Problem

Abstract

We present novel empirical findings regarding the shareholder-management agency problem. First we expand the set of factors that cause agency problem to include both dollar value of management holdings and also its fractional holdings. Second, we use estimation equations that allow a nonlinear or contrary relation between fractional holdings and of agency problem measure. Third, we include as another variable, proxy for mangers to include informal as well as formal control of the firm’s decision making. Specifically, besides management fractional holding (which determine their formal voting rights) we consider CEO’s tenure and management size. Forth, we find evidence that management ownership and management control factors relatedness to agency problem indications may be different in the finance sector. Finally, we make use of changes in the number of employees as a novel indication of agency problem. We find evidence supporting our prediction that management holdings effect shareholder-management agency problem in two opposite directions. Specifically we find that when management fractional holdings falls below approximately 30%, agency problem increases with these holdings, and when management fractional holdings rise above approximately 30%, agency problem then decreases.