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Structural Models and Endogeneity in Corporate Finance: The Link Between Managerial Ownership and Corporate Performance

60 Pages Posted: 18 Jul 2003 Last revised: 17 Jul 2015

Jeffrey L. Coles

David Eccles School of Business, University of Utah; Arizona State University (ASU) - Finance Department

Michael L. Lemmon

University of Utah - Department of Finance

Felix Meschke

University of Kansas - Finance Area

Abstract

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

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

Jeffrey L. Coles

David Eccles School of Business, University of Utah ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States
801-587-9093 (Phone)

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
P.O. Box 873906
Tempe, AZ 85287-3906
United States
480-965-4475 (Phone)
480-965-8539 (Fax)

Michael L. Lemmon

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States
801-585-5210 (Phone)
801-581-7214 (Fax)

Felix Meschke (Contact Author)

University of Kansas - Finance Area ( email )

Capitol Federal Hall
1654 Naismith Drive
Lawrence, KS 66045
United States
(347) 433-5495 (Phone)

HOME PAGE: http://www.business.ku.edu/faculty/meschke-felix/

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