Management Ownership and Market Valuation: An Empirical Analysis

Posted: 17 Nov 2009

See all articles by Randall Morck

Randall Morck

University of Alberta - Department of Finance and Statistical Analysis; National Bureau of Economic Research (NBER); European Corporate Governence Institute; Asian Bureau of Finance and Economic Research

Andrei Shleifer

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Robert W. Vishny

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Date Written: 1998

Abstract

Investigates the relationship between management ownership and market valuation of the firm, as measured by Tobin's Q. The convergence-of-interest hypothesis suggests that a firm's market valuation should rise as its management owns an increasingly large portion of the firm. On the other hand, the entrenchment hypothesis suggests that as management increases its ownership, the incentive to maximize value declines as market discipline becomes less effective against a larger shareholding manager. The authors attempt to reconcile these competing theoretical predictions by examining empirical data of firm management ownership and Tobin's Q. The latter variable, equal to the ratio of the firm's market value to the replacement cost of its physical assets, is used as a proxy for market valuation of the firm's assets. A piecewise linear regression reveals a positive correlation between management ownership and Tobin's Q in the 0% to 5% ownership range. From 5% to 25% management ownership, the relationship is negative, but at levels greater than 25% the relationship again is positive. The authors put forward a theory that the convergence-of-interest effect operates over the whole range of ownership, whereas the entrenchment effect reaches a maximum value at some less than 100% management ownership mark. Thus, at low levels, the convergence effect is predominant. At somewhat higher levels, the entrenchment effect becomes predominant. Finally, having reached a maximum value, the still-increasing convergence effect again becomes the predominant factor. Additional analysis further disaggregates the data to determine the effect of founding family member, other insider, and outsider members of the board of directors on Tobin's Q. Family member board membership is found to have a negative effect on the variable. (CAR)

Keywords: Inside ownership, Family firms, Operator ownership, Market value, Valuation, Boards of directors, Shareholders, Founders

Suggested Citation

Morck, Randall K. and Shleifer, Andrei and Vishny, Robert W., Management Ownership and Market Valuation: An Empirical Analysis (1998). Journal of Financial Economics, Vol. 20, p. 293-315 1998. Available at SSRN: https://ssrn.com/abstract=1506393

Randall K. Morck (Contact Author)

University of Alberta - Department of Finance and Statistical Analysis ( email )

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Edmonton, Alberta T6G 2R6
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National Bureau of Economic Research (NBER)

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European Corporate Governence Institute ( email )

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Asian Bureau of Finance and Economic Research ( email )

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Andrei Shleifer

Harvard University - Department of Economics ( email )

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Cambridge, MA 02138
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HOME PAGE: http://www.economics.harvard.edu/~ashleife/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Robert W. Vishny

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
312-702-2522 (Phone)
312-702-0118 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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