Managerial Ownership and Firm Performance in German Small and Medium-Sized Enterprises

Abstract

This paper studies the effect of managerial ownership on performance and the determinants of managerial ownership for small and medium-sized private companies. We use a panel of around 1300 firms in the German business-related service sector for the years 1997-2000. Managerial ownership up to around 80 percent has a positive impact on firm performance (incentive effect), for higher shares the effect becomes negative entrenchment effect). Moreover, risk-aversion of managers and signalling of firm quality leads to a non-linear relationship between managerial ownership and the risk exposure of a firm. The determinants of performance and ownership are estimated simultaneously.

Keywords: corporate governance, managerial ownership, firm performance, small and medium-sized enterprises

JEL Classification: G32; C23