The Joint Determinants of Managerial Ownership, Board Independence, and Firm Performance

45 Pages Posted: 4 Feb 2008 Last revised: 13 Jul 2008

See all articles by Jeffrey L. Coles

Jeffrey L. Coles

University of Utah - Department of Finance; Arizona State University (ASU) - Finance Department

Michael L. Lemmon

University of Utah - Department of Finance

Yan Albert Wang

Auburn University

Date Written: July 2, 2008

Abstract

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

Coles, Jeffrey L. and Lemmon, Michael L. and Wang, Yan Albert, The Joint Determinants of Managerial Ownership, Board Independence, and Firm Performance (July 2, 2008). Second Singapore International Conference on Finance 2008. Available at SSRN: https://ssrn.com/abstract=1089758 or http://dx.doi.org/10.2139/ssrn.1089758

Jeffrey L. Coles

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States
801-587-9093 (Phone)

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
P.O. Box 873906
Tempe, AZ 85287-3906
United States
480-965-4475 (Phone)
480-965-8539 (Fax)

Michael L. Lemmon

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States
801-585-5210 (Phone)
801-581-7214 (Fax)

Yan Albert Wang (Contact Author)

Auburn University ( email )

315 Lowder Hall
Department of Finance
Auburn, AL 36849
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
915
Abstract Views
3,252
rank
24,303
PlumX Metrics