The Joint Determinants of Managerial Ownership, Board Independence, and Firm Performance
45 Pages Posted: 4 Feb 2008 Last revised: 13 Jul 2008
Date Written: July 2, 2008
We specify a simple structural model to isolate the economic determinants of managerial ownership and board structure in a value-maximizing contracting environment. The optimal firm size, level of managerial ownership, and the proportion of outsiders on the board is jointly determined by the relative importance of the three productivity parameters of physical assets, managerial/insider effort and outside director's advising/monitoring role in the firm production process. Our model provides an equilibrium explanation for the cross-sectional relationships between managerial ownership, board structure, and firm performance that is consistent with existing evidence. We use the model to provide an alternative explanation for the observed changes in compensation structure arising from new rules mandating changes in board independence following the Sarbanes Oxley act in 2002.
Keywords: Corporate Governance, Board Composition, Managerial Ownership, Structural Model
JEL Classification: G32, G34, L29
Suggested Citation: Suggested Citation