Managerial Ownership and Firm Performance: Incentives or Rewards?

Abstract

Managerial ownership of equity both aligns shareholder and management interests and places voting power in the hands of corporate decision-makers. The cross-sectional relation between management ownership and firm performance has been interpreted as evidence of these conflicting influences. In this paper, new evidence draws attention to the cumulation of managerial stockholdings and argue for a reversal of causality in the ownership-performance relation: firm performance is a determinant of management ownership. Subsample evidence that documents increased sensitivity of firm performance to managerial ownership in research- intensive firms is also presented. Both systematic bias due to the mismeasurement of performance and the endogeneity of managerial stockholdings can explain this result.

JEL Classification: G32