Managerial Equity Ownership and the Demand for Outside Directors

33 Pages Posted: 20 Jun 2002

See all articles by Ken V. Peasnell

Ken V. Peasnell

Lancaster University - Department of Accounting and Finance

Peter F. Pope

Bocconi University; London School of Economics and Political Science

Steven Young

Lancaster University - Department of Accounting and Finance

Date Written: October 2001

Abstract

This paper investigates the relationship between managerial equity ownership and the demand for outside directors in the U.K. corporate control process. In recognition of both the benefits (incentive-alignment effects) and costs (entrenchment effects) of managerial ownership, we propose and test for evidence of a convex association between the proportion of outside board members and the level of insider ownership. Two non-linear specifications (quadratic and logarithmic) are estimated and compared with the simple linear relationship assumed in prior research. Cross-sectional results provide strong evidence that the association between board composition and managerial ownership is indeed non-linear, with both the quadratic and logarithmic models outperforming the linear specification. Further analysis indicates that of the two non-linear models, the logarithmic specification dominates. These findings are also confirmed by an analysis of changes in board composition in response to the Cadbury Report's best practice recommendations on the use of outside directors. Overall, our results suggest that the role of outside directors and their association with managerial ownership is more complex than the simple substitution effect previously assumed.

Keywords: Managerial ownership, Board of directors, Cadbury Report

JEL Classification: G32, G34

Suggested Citation

Peasnell, Kenneth V. and Pope, Peter F. and Young, Steven, Managerial Equity Ownership and the Demand for Outside Directors (October 2001). EFMA 2002 London Meetings. Available at SSRN: https://ssrn.com/abstract=314829 or http://dx.doi.org/10.2139/ssrn.314829

Kenneth V. Peasnell

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster LA1 4YX
United Kingdom
+44 1524 593631 (Phone)
+44 1524 847321 (Fax)

Peter F. Pope

Bocconi University ( email )

Dept of Accounting
Milan, 20136
Italy

London School of Economics and Political Science ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Steven Young (Contact Author)

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster LA1 4YX
United Kingdom
+441 5245-94242 (Phone)
+441 5248-47321 (Fax)

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