Firm Value and Managerial Incentives

40 Pages Posted: 4 Nov 2008

See all articles by Alexander Ljungqvist

Alexander Ljungqvist

Stockholm School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Research Institute of Industrial Economics (IFN)

Michel A. Habib

University of Zurich; Swiss Finance Institute

Date Written: November 2000


We examine the relation between firm value and managerial incentives in a sample of 1,307 publicly-held U.S. firms in 1992-1997. As predicted by Berle and Means (1932), we find that CEOs do not maximize firm value when they are not the residual claimant: our firms have higher Tobin’s Q, the higher are CEO stockholdings. We also investigate the incentive properties of options and find that CEOs appear to hold too many options and that these options are insufficiently sensitive to firm risk. Our results do not appear to be driven by endogeneity biases. To assess the economic significance of the suboptimal provision of incentives, we compute an explicit performance benchmark which compares a firm’s actual Tobin’s Q to the Q* of a hypothetica fully-efficient firm having the same inputs and characteristics as the original firm. The Q of the average sample firm is around 12% lower than its Q*, equivalent to a $751 million reduction in its potential market value.

Suggested Citation

Ljungqvist, Alexander and Habib, Michel A., Firm Value and Managerial Incentives (November 2000). NYU Working Paper No. 2451/26705, Available at SSRN:

Alexander Ljungqvist (Contact Author)

Stockholm School of Economics ( email )

111 60 Stockholm

Centre for Economic Policy Research (CEPR)

United Kingdom

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15

Michel A. Habib

University of Zurich ( email )

Plattenstrasse 14
Zurich, 8032
41-44-634-2507 (Phone)
41-44-634-4903 (Fax)


Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4

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