Managerial Equity Ownership and the Demand for Outside Directors

Ken V. Peasnell · Peter F. Pope

133 citations0/0 files storedEuropean Financial Management

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Abstract

This paper examines the linkage between the use of outside directors and managerial ownership. We conjecture there are two linkages: the standard incentive‐alignment demand for monitoring when managers own little stock and an entrenchment‐amelioration demand when managerial stock ownership is high. As a consequence, we predict the association between managerial ownership and board composition will be nonlinear (U‐shaped if the entrenchment effect is sufficiently pronounced). Using UK data, we find that both quadratic and logarithmic models outperform the simple linear relationship assumed in prior research and that the substitution between managerial ownership and board composition is stronger than hitherto supposed.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1983Separation of Ownership and Control 1993The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems 1988Management ownership and market valuation 1985The Structure of Corporate Ownership: Causes and Consequences 1990Additional evidence on equity ownership and corporate value 1988Outside directors and CEO turnover 1996Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders

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