Role of Management with Diffuse Ownership

of man
Role of management with diffuse ownership:

• Diffuse stock ownership

– Limited liability public corporation

– Diffuse ownership of voting equity shares

– Large number of individual share owners

– Separation of ownership and control

• Operations of firm are conducted and controlled by managers without major stock ownerships

• Conflicts of interest arise between owners and managers

OWNERSHIP CONCENTRATION:

• Equity ownership by managers must balance

– Convergence or alignment of interests

– Entrenchment considerations — managerial ownership and control of voting rights may allow pursuit of self-interest

• Ownership and performance

– Stulz (1988)

• Model in which at low levels of management ownership, increased equity holdings improve convergence — enhance firm value

• At higher levels of insider ownership, managerial entrenchment prevents takeovers — decrease firm value

– Morck, Schleifer, and Vishny (MSV) (1988)

• Study based on 1980 data

• Performance (measured by q-ratio) related to management or insider ownership percentages

– Ownership concentration increased from 0 to 5%

• Performance improved

• Alignment-of-interest effect

• Direction of causality may be reversed — high performance firms more likely to give managers stock bonuses

• High performance firms may have substantial intangible assets that require greater ownership concentrations to induce proper use of these assets.

– Ownership concentration in range 5% to 25%

• Performance deteriorated

• Management entrenchment dampens performance