The Effect of Managerial Ownership of Shares and Voting Concentration on Performance
CEP Discussion Papers from Centre for Economic Performance, LSE
We investigate the empirical relationship between managerial ownership of shares and corporate performance, using a panel dataset of 389 UK manufacturing companies. The two measures of performance investigated are: market valuation, as expressed by Tobin's Q, and total factor productivity growth, measured by estimating a production function. The explicit consideration of companies with dual structures of voting rights enables the study of the effects of a disparity in the ownership of equity and votes by managers, and the effects of the concentration of voting rights which is made possible by departures from one share-one vote. In our sample, managerial ownership of shares is not related to market valuation, as expressed by Tobin's Q: this casts doubts on the usual explanation of greater convergence of interests given for the increase in market value following a takeover or a buyout which results in a higher percentage of shares in the hands of the management. Managerial ownership of shares seems however to have a positive effect on productivity growth, even if our estimates are not highly significant. The disparity between equity and votes ownership has, instead, a strong and negative effect both for market valuation and productivity growth, when managers own more votes than equity claims: this is probably due to both the power that vote ownership has of entrenching management and insulating it from the market for corporate control, and the lack of the convergence of interests due to lower equity holdings. When equity and votes are held in the same proportion, the two effects on market valuation seem to balance out. Departures from share-one vote allow any shareholder, not just managers to choose different proportions of equity and votes, so we have used a measure of voting concentration to assess the impact of dual-classes security structures on the total market value of the firm. Positive values of voting concentration have a negative effect on market valuation and a possibly negative effect on productivity growth, providing further evidence that the incentive effects of equity and vote ownership are present and important.
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