Ownership Structure, Managerial Behavior and Corporate Value

Journal of Corporate Finance 11 (2005) 645 – 660 www.elsevier.com/locate/econbase

Ownership structure, managerial behavior and corporate value
J.R. Daviesa, David Hillierb,T, Patrick McColganc a University of Strathclyde, UK b University of Leeds, UK c University of Aberdeen, UK

Received 21 November 2002; accepted 6 July 2004 Available online 20 April 2005

Abstract The nonlinear relationship between corporate value and managerial ownership is well documented. This has been attributed to the onset of managerial entrenchment, which results in a decrease of corporate value for increasing levels of managerial holdings. We propose a new structure for this relationship that accounts for the effect of conflicting managerial incentives, and external and internal disciplinary monitoring mechanisms. Using this specification as the basis for our analysis, we provide evidence that the managerial ownership–corporate value relationship is co-deterministic. This finding is at odds with recent work which reports that corporate value determines managerial ownership but not vice-versa. D 2005 Elsevier B.V. All rights reserved.
JEL classification: G32 Keywords: Ownership structure; Capital expenditure; Corporate value; Tobin’s Q

1. Introduction In a market without agency problems, corporate managers will choose investments that maximise the wealth of shareholders. In practice, competing objectives which are incompatible with the shareholder wealth-maximising paradigm may also be pursued.
T Corresponding author. Leeds University Business School, University of Leeds, Maurice Keyworth Building Leeds, LS2 9JT, UK. Tel.: [phone]; fax: [phone]. E-mail address: [e-mail] (D. Hillier). 0929-1199/$ - see front matter D 2005 Elsevier B.V. All rights reserved. doi:10.1016/j.jcorpfin.2004.07.001

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J.R. Davies et al. / Journal of Corporate Finance 11 (2005) 645–660

Following Jensen and Meckling (1976), a large literature has developed

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