44 Pages Posted: 8 Jul 2010 Last revised: 30 Jan 2011
Date Written: January 26, 2011
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: Suggested Citation
By Kevin Murphy