How Managerial Ownership and the Market for Corporate Control Can Improve Investment Timing
36 Pages Posted: 28 May 2020
Date Written: May 1, 2020
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: Suggested Citation