Governance Thresholds, Managerial Ownership and Corporate Performance: Evidence from the UK

40 Pages Posted: 8 Mar 2011 Last revised: 17 May 2013

See all articles by Sebastian Bos

Sebastian Bos

University of York - The York Management School; KPMG Luxembourg

Andrew Pendleton

University of York (UK)

Steve Toms

University of Leeds - Leeds University Business School (LUBS); University of Leeds - Division of Accounting and Finance

Date Written: January 15, 2013

Abstract

The paper examines the relationship between managerial share ownership and firm performance for British stock-exchange listed firms. We seek to establish a link between the predictions of agency theory and the corporate control environment using key governance and disclosure thresholds as determinants of the nonlinear relationship between managerial share ownership and performance. We also argue that the use of conventional accounting and market-based performance measures can be problematic in estimating managerial efficiency. The Clean Surplus Accounting Rate of Return is introduced as an alternative performance measure to Tobin’s Q and ROE.

Our results indicate that relationships between managerial share ownership and corporate governance outcomes might be linked to key regulatory disclosure thresholds and minority shareholders rights of UK Company Law. We find that shareholder wealth is maximised when equity ownership by executive directors is below the 5% equity threshold of the Association of British Insurers’ dilution limit and sections 376 to 378 of Companies Act 1985 or above the 15% equity threshold of section 110 of Companies Act 1989 and section 127 of Companies Act 1985. Share ownership by executives between 5% and 15% is found to lead to declining firm performance.

Our findings confirm the importance of testing thresholds based on corporate governance regulation rather than inductively deriving them from the data. We also show that it is desirable to decompose board ownership into executive and non-executive components. Our results further support the use of the Clean Surplus Accounting Rate of Return as an alternative performance variable.

Keywords: Governance threshold, managerial ownership, performance, piecewise linear regressions

JEL Classification: G32, G34, K20

Suggested Citation

Bos, Sebastian and Pendleton, Andrew and Toms, Steve, Governance Thresholds, Managerial Ownership and Corporate Performance: Evidence from the UK (January 15, 2013). Available at SSRN: https://ssrn.com/abstract=1776303 or http://dx.doi.org/10.2139/ssrn.1776303

Sebastian Bos

University of York - The York Management School ( email )

Freboys Lane
Heslington
York, North Yorkshire YO10 5GD
United Kingdom

KPMG Luxembourg ( email )

9, allée Scheffer
Luxembourg, L-2520
Luxembourg

Andrew Pendleton

University of York (UK) ( email )

Heslington
York YO10 5DD
United Kingdom

Steve Toms (Contact Author)

University of Leeds - Leeds University Business School (LUBS) ( email )

Leeds LS2 9JT
United Kingdom

University of Leeds - Division of Accounting and Finance ( email )

Leeds LS2 9JT
United Kingdom

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