How Managerial Ownership and the Market for Corporate Control Can Improve Investment Timing

36 Pages Posted: 28 May 2020

See all articles by Graeme Guthrie

Graeme Guthrie

Victoria University of Wellington - School of Economics & Finance

Cameron Hobbs

Victoria University of Wellington - School of Economics & Finance

Date Written: May 1, 2020

Abstract

We show how directors can set the level of CEO ownership to influence the investment-timing decisions of empire-building CEOs, and how boards' decisions are affected by the market for corporate control. The prospect of a future takeover means that CEOs with no ownership stake will over-invest in some types of projects and under-invest in others, but these problems are less severe when CEOs have an ownership stake. The value-maximizing level of CEO ownership depends on a firm's investment opportunities. When the takeover threat is weak, boards should not award CEOs any shares when the NPV from investment is large and positive, but should grant CEOs a substantial ownership stake when the NPV is negative. When the takeover threat is strong, boards should award CEOs a moderate ownership stake when the NPV is large and positive, but a small stake when the NPV is more modest.

Keywords: Managerial Ownership, Market for Corporate Control, Manager-Shareholder Conflict, Investment Incentives, Real Options

JEL Classification: D25, G31, G34

Suggested Citation

Guthrie, Graeme and Hobbs, Cameron, How Managerial Ownership and the Market for Corporate Control Can Improve Investment Timing (May 1, 2020). Available at SSRN: https://ssrn.com/abstract=3589923 or http://dx.doi.org/10.2139/ssrn.3589923

Graeme Guthrie (Contact Author)

Victoria University of Wellington - School of Economics & Finance ( email )

P.O. Box 600
Wellington 6140
New Zealand
64 4 463 5763 (Phone)

Cameron Hobbs

Victoria University of Wellington - School of Economics & Finance ( email )

P.O. Box 600
Wellington 6001
New Zealand

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