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

49 Pages Posted: 28 May 2020 Last revised: 1 Mar 2021

See all articles by Graeme Guthrie

Graeme Guthrie

Victoria University of Wellington - Te Herenga Waka - School of Economics & Finance

Cameron Hobbs

Victoria University of Wellington - Te Herenga Waka - School of Economics & Finance

Date Written: February 28, 2021

Abstract

We show how CEO ownership and the market for corporate control interact to influence the investment-timing decisions of empire-building CEOs. 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. Antitakeover laws that weaken a raider's position in a hostile takeover induce raiders to launch friendly takeovers sooner. The increased takeover threat induces CEOs to delay investing in positive NPV projects, but encourages them to take actions that initiate selling the firm when the takeover gains are high. Optimal ownership-generated incentives and the market for corporate control add more value after antitakeover laws are introduced, especially in situations when potential takeover gains are large.

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

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 (February 28, 2021). 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 - Te Herenga Waka - School of Economics & Finance ( email )

P.O. Box 600
Wellington 6140
New Zealand

HOME PAGE: http://sites.google.com/view/graemeguthrie

Cameron Hobbs

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

P.O. Box 600
Wellington 6001
New Zealand

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