The Interrelationship Between Managerial Ownership and Board Structure

Meziane Lasfer

166 citations0/0 files storedJournal of Business Finance &amp Accounting

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Corporate Finance and Governance Corporate Governance and Law Family Business Performance and Succession

Abstract

Abstract: The paper tests the hypothesis that high managerial ownership entrenches managers by allowing the CEO to create a board that is unlikely to monitor. The results show a strong negative relationship between the level of managerial ownership and corporate governance factors, such as, the split of the roles of the CEO and the Chairman, the proportion of non‐executive directors, and the appointment of a non‐executive director as a Chairman. I also find that companies with low managerial ownership are more likely to change their board structure to comply with the Cadbury (1992) recommendations. The results suggest that managers, through their high ownership, choose a board that is unlikely to monitor. Overall, the findings cast doubt on the effectiveness of the board as an internal corporate governance mechanism when managerial ownership is high.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1983Separation of Ownership and Control 1986Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers 1997A Survey of Corporate Governance 1980Agency Problems and the Theory of the Firm 1993The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems 1988Management ownership and market valuation 1996Higher market valuation of companies with a small board of directors

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