The nonlinear relation between agency costs and managerial equity ownership

Kate Jelinek and Pamela S. Stuerke

International Journal of Managerial Finance, 2009, vol. 5, issue 2, 156-178

Abstract: Purpose - This paper aims to examine the impact of managerial equity ownership on return on assets as a measure of profitability and two financial statement‐based agency cost measures, i.e. asset utilization and an expense ratio, which proxy for management's efficiency in use of assets and perquisite consumption, respectively. Design/methodology/approach - Multivariate tests are constructed to examine the nonlinear relation between managerial equity ownership and both profitability and agency costs, using interaction terms to capture the relation at various levels of managerial ownership. Findings - The paper documents that managerial equity ownership is nonlinearly and positively associated with return on assets and asset utilization, and nonlinearly and negatively associated with the expense ratio, after controlling for firm size, leverage, corporate diversification, institutional ownership, research intensity, firm age, and executive stock options. Research limitations/implications - The results imply that the ability of managerial equity ownership to reduce agency costs decreases as levels of ownership increase. Further, the results indicate that, in some industries, high levels of ownership lead to increased expense ratios, suggesting increased perquisite consumption. Finally, these results suggest that, above a certain level in some industries, managerial equity ownership only marginally encourages efficient asset utilization but does not significantly deter excessive spending. Originality/value - The paper provides a link between research that demonstrates a linear relation between managerial equity ownership and financial‐statement based profitability and agency cost measures and research that finds a nonlinear relation between managerial equity ownership and Tobin'sQ, a proxy for firm performance.

Keywords: Corporate governance; Costs; Equity capital; Managers; Business performance (search for similar items in EconPapers)
Date: 2009
References: Add references at CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (text/html)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (application/pdf)
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eme:ijmfpp:v:5:y:2009:i:2:p:156-178

DOI: 10.1108/17439130910947886

Access Statistics for this article

International Journal of Managerial Finance is currently edited by Dr Alfred Yawson

More articles in International Journal of Managerial Finance from Emerald Group Publishing Limited
Bibliographic data for series maintained by Emerald Support ().