We use cookies to give you the best experience possible. By continuing we’ll assume you’re on board with our cookie policy

Role of Management with Diffuse Ownership

essay
The whole doc is available only for registered users

A limited time offer! Get a custom sample essay written according to your requirements urgent 3h delivery guaranteed

Order Now

β€’ Diffuse stock ownership

– Limited liability public corporation

– Diffuse ownership of voting equity shares

– Large number of individual share owners

– Separation of ownership and control

β€’ Operations of firm are conducted and controlled by managers without major stock ownerships

β€’ Conflicts of interest arise between owners and managers

OWNERSHIP CONCENTRATION:

β€’ Equity ownership by managers must balance

– Convergence or alignment of interests

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

β€’ Ownership and performance

– Stulz (1988)

β€’ Model in which at low levels of management ownership, increased equity holdings improve convergence β€” enhance firm value

β€’ At higher levels of insider ownership, managerial entrenchment prevents takeovers β€” decrease firm value

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

β€’ Study based on 1980 data

β€’ Performance (measured by q-ratio) related to management or insider ownership percentages

– Ownership concentration increased from 0 to 5%

β€’ Performance improved

β€’ Alignment-of-interest effect

β€’ Direction of causality may be reversed β€” high performance firms more likely to give managers stock bonuses

β€’ 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%

β€’ Performance deteriorated

β€’ Management entrenchment dampens performance

– Ownership concentration above 25%

β€’ Performance improved but slowly

β€’ Incremental entrenchment effects attenuated

– McConnell and Servaes (MS) (1990)

β€’ Replicate MSV study using 1976 and 1986 data

– For 1976, relationship between ownership concentration and performance relatively flat with moderate convergence of interest effect up to 50%, after which curve flattens and then declines moderately

– For 1986, relationship curve rises relatively sharply to 40%, after which it is relatively flat to 50% followed by sharp decline

β€’ Leverage, institutional ownership, R&D expenditures, and advertising Cho (1998)

β€’ Replicates MSV patterns using ordinary least square regressions and 1991 data

β€’ Tests for endogenous ownership structure

β€’ Finds that corporate value affects ownership structure, but not reverse

β€’ Bristow (1998)

β€’ Sample of consistently derived insider holdings on 4,000 firms during 1986-95

β€’ Relationship between management ownership and performance varies for each of the ten years

β€’ expenditures do not change initial findings

β€’ Economic variables influence ownership-performance relationship

– Relative growth rates of industries

– Differences in demand-supply relationships among industries

– Relative value change patterns among industries and firms within them

– Stock price movements

β€’ Interpretations of diverse data patterns

– May reflect economic identification problem discussed by Cho

– True relationship may be Demsetz-Lehn theory of no relationship between ownership level and performance

– Holderness, Kroszner, and Sheehan (1999)

β€’ Percentage of managerial equity ownership

– Mean increased from 12.9% in 1935 to 21.1% in 1995

– Median increased from 6.5% in 1935 to 14.4% in 1995

β€’ Doubling of managerial ownership may imply improvement in corporate governance in U.S.

– Managerial ownership and bond returns β€” Bagnani, Milonas, Saunders, and Travlos (1994)

– No relation between bond returns and managerial ownership below 5%

– Positive relation for managerial ownership between 5% and 25%

β€’ Increased incentives for managers to act in shareholders’ interest, taking risks that are potentially harmful to bondholders

β€’ Rational bondholders required higher returns

– Weak negative relation for ownership above 25%

β€’ Managers become more risk averse

β€’ Managers have high stake in firm β€” greater incentives to protect their private benefits and objectives

β€’ Managers’ interest more aligned with bondholders β€” lower bond premia

– Financial policy and ownership concentration

– Share repurchases financed by debt

β€’ Insider group does not tender its shares in repurchases β€” percentage equity shares increased

β€’ Increased convergence of interest effect

– Incentive effects of high management ownership percentages performed positive role in LBOs and MBOs

Related Topics

We can write a custom essay

According to Your Specific Requirements

Order an essay
icon
300+
Materials Daily
icon
100,000+ Subjects
2000+ Topics
icon
Free Plagiarism
Checker
icon
All Materials
are Cataloged Well

Sorry, but copying text is forbidden on this website. If you need this or any other sample, we can send it to you via email.

By clicking "SEND", you agree to our terms of service and privacy policy. We'll occasionally send you account related and promo emails.
Sorry, but only registered users have full access

How about getting this access
immediately?

Your Answer Is Very Helpful For Us
Thank You A Lot!

logo

Emma Taylor

online

Hi there!
Would you like to get such a paper?
How about getting a customized one?

Can't find What you were Looking for?

Get access to our huge, continuously updated knowledge base

The next update will be in:
14 : 59 : 59