60 Pages Posted: 18 Jul 2003 Last revised: 17 Jul 2015
This paper presents a parsimonious, structural model that isolates primary economic determinants of the level and dispersion of managerial ownership, firm scale, and performance and the empirical associations among them. In particular, variation across firms and through time of estimated productivity parameters for physical assets and managerial input and corresponding variation in optimal compensation contract and firm size combine to deliver the well-known hump-shaped relation between Tobin's Q and managerial ownership. To assess the effectiveness of standard econometric approaches to the endogeneity problem, we apply those remedies to panel data generated from the model. The unfortunate conclusion is that, at least in the ownership-performance context, proxy variables, fixed effects, and instrumental variables do not generally provide reliable solutions to simultaneity bias.
Notes: Previously titled "Structural Models and Endogeneity in Corporate FinanceStructural Models and Endogeneity in Corporate Finance: The Link Between Managerial Ownership and Corporate Performance"
Keywords: Corporate governance, Managerial ownership, Executive compensation, Corporate performance, Structural model, Endogeneity
JEL Classification: G32, G34, L20
Suggested Citation: Suggested Citation
Coles, Jeffrey L. and Lemmon, Michael L. and Meschke, Felix, Structural Models and Endogeneity in Corporate Finance: The Link Between Managerial Ownership and Corporate Performance. Journal of Financial Economics (JFE) 103, no. 1 (2012): 149-168. Available at SSRN: https://ssrn.com/abstract=423510 or http://dx.doi.org/10.2139/ssrn.423510
By Kevin Murphy