Control or invest? Understanding the complex interests of managerial ownership

Abstract

Purpose

Conventional studies discuss the effect of managerial ownership on firm performance and have conflicting findings. This paper seeks to find divergent mutual effects existing between managerial ownership and firm performance.

Design/methodology/approach

The three‐stage‐least squares method and simultaneous equation model is adopted to obtain more efficient coefficient estimation. Both firm‐year observations and company mean variables are used to capture the structural relation and mutual effects between ownership structure and firm performance.

Findings

This paper finds divergent mutual effects existing. In a diffused ownership structure, better firm performance may induce management to hold more stockholding. Management with mid‐range of stockholdings has a positive effect on firm performance but not vice versa. For highly concentrated ownership structure, a negative mutual effect exists.

Practical implications

These findings provide the investment purpose as an alternative explanation for insiders' stockholding that agrees with investors' risk aversion attitude in practice. For highly concentrated ownership, possible management entrenchment behavior resulting from dominant control power should be carefully considered and monitored to protect minority shareholders.

Originality/value

This paper provides new evidence that complicated mutual effects may exist between managerial ownership and firm performance. It offers insights for both investors and researchers in corporate governance.

Citation

Chou, S., Wu, C. and Chen, A. (2007), "Control or invest? Understanding the complex interests of managerial ownership", Studies in Economics and Finance, Vol. 24 No. 3, pp. 188-206. https://doi.org/10.1108/10867370710817383