CEO Ownership and Valuation

Abstract

We find a highly significant hump shaped relation between Tobin’s Q and CEO share ownership for firms under weak external governance (EG), but find no relation for firms under strong EG. These relations illustrate the substitution effect of EG and CEO ownership in mitigating agency problems at normal ranges of ownership and the anti-entrenchment effect of strong EG at very large ownership. To buttress these arguments, we relate CEO ownership to R&D activities, a possible channel through which CEO ownership may affect Tobin’s Q by influencing discretionary efforts and risk choices. We find similar relations: A hump shaped relation between R&D expenditures and CEO ownership under weak EG, and no relation under strong EG. EG is measured by product market competition or institutional ownership concentration. The results are robust to CEO-firm pair fixed effects and to alternative model specifications, key variables, EG measures, and sample constructions. They are also robust to various tests addressing endogeneity issues concerning CEO ownership and our measures of EG.

Keywords: Managerial Share Ownership, Product Market Competition, R&D activities, Risk Choices, Institutional Investor Concentration, Entrenchment

JEL Classification: G34, G32, D86, L22