CEO Ownership, External Governance, and Risk-taking

44 Pages Posted: 8 Jul 2010 Last revised: 30 Jan 2011

E. Han Kim

University of Michigan, Stephen M. Ross School of Business

Yao Lu

University of Michigan - Stephen M. Ross School of Business; Tsinghua University, SEM

Date Written: January 26, 2011

Abstract

We find a significant hump-shaped relation between firm valuation and CEO ownership when external governance (EG) is weak, but the relation is insignificant when EG is strong. These interactive effects are identified while controlling for firm-fixed effects. The results imply that CEO ownership and EG are substitutes in mitigating agency problems at low levels of ownership. At large ownership, the combination of large voting rights and high wealth-performance sensitivity causes CEOs to take insufficient risk, unless strong EG holds them accountable for performance. To identify channels through which CEO ownership affects firm value, we examine R&D, which tends to be discretionary and risky. We find strikingly similar interactive effects on R&D and conclude that CEO ownership affects both effort and risk-taking when EG is weak. EG is measured by product market competition or institutional ownership concentration. Our results are robust to endogeneity issues concerning CEO ownership and EG, and a battery of other tests.

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

JEL Classification: G34, G32, D86, L22

Suggested Citation

Kim, E. Han and Lu, Yao, CEO Ownership, External Governance, and Risk-taking (January 26, 2011). Available at SSRN: https://ssrn.com/abstract=1635943 or http://dx.doi.org/10.2139/ssrn.1635943

E. Han Kim

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-764-2282 (Phone)
734-763-3117 (Fax)

Yao Lu (Contact Author)

University of Michigan - Stephen M. Ross School of Business ( email )

701 Tappan St. Rm R4323
Ann Arbor, MI 48109
United States
7347093843 (Phone)

HOME PAGE: http://sitemaker.umich.edu/yaolu_michigan/yao_lu_s_homepage

Tsinghua University, SEM ( email )

Wenlun Building 347#
Beijing, 100084
China
8610-62797399 (Phone)

HOME PAGE: http://sitemaker.umich.edu/yaolu_michigan/yao_lu_s_homepage

Paper statistics

Downloads
692
Rank
28,754
Abstract Views
5,412