Ownership Structure, Managerial Behavior and Corporate Value

Abstract

The nonlinear relationship between corporate value (Tobin's Q) and managerial ownership is well documented. This has been attributed to the onset of managerial entrenchment, which results in a decrease of corporate value for increasing levels of insider holdings. We propose a new structure for the corporate value - managerial ownership function that accounts for the effect of conflicting managerial incentives, and external and internal disciplinary monitoring mechanisms. Using this specification as the basis for our analysis, we provide evidence that the managerial ownership - corporate value relationship is co-deterministic. This finding is at odds with recent work by Cho (1998) and Himmelberg et al. (1999) who report that corporate value determines insider ownership but not vice-versa. Keywords: Insider Ownership, Capital Expenditure, Corporate Value, Tobin's Q