Shareholder Rights, Managerial Incentives, and Firm Value

Abstract

This paper investigates interactions between two central corporate governance mechanisms: shareholder rights and managerial ownership. I find that the effect of managerial ownership on firm value crucially depends on shareholder rights. Managerial ownership enhances firm value when shareholder rights are strong, but reduces firm value when shareholder rights are weak. Announcement returns of manager share purchases in the open market are also lower for firms with weak shareholder rights. Furthermore, firms with weak shareholder rights have significantly lower managerial ownership. My findings suggest that shareholder rights and managerial ownership are complementary governance mechanisms.