Page info: *Author:Mathiesen, H. *Document version:2.6. *Copyright 1997-2019, H. Mathiesen.Legal notice. 


Table: Hypotheses - Effects from ownership structure on performance and other incentive mechanisms in corporate governance


Click here to see an exhibition on these issues and their relation to other hypotheses in corporate governance.


4) From ownership structure to corporate performance

4A: Incentive alignment argument: More equity ownership by the manager may increase corporate performance because it means better alignment of the monetary incentives between the manager and other equity owners (Jensen and Meckling [1976]). Click to get a rigorous model on this issue.


4B: Takeover premium argument: More equity ownership by the manager may increase corporate performance because the managers are more capable of opposing a takeover threat from the market for corporate control and as a result, the raiders in this market will have to pay higher takeover premiums (Stulz [1988]).


4C: Entrenchment argument: More equity ownership by the manager may decrease financial performance because managers with large ownership stakes may be so powerful that they do not have to consider other stakeholders interest. They may also be so wealthy that they no longer intend to maximize profit but get more utility from maximizing market share or technological leadership etc (Morck, Shleifer and Vishny [1988]).


4D: Cost of capital argument: Increased ownership concentration (any kind of owner) decreases financial performance because it raises the firm's cost of capital as a result of decreased market liquidity or decreased diversification opportunities on behalf of the investor (Fama and Jensen [1983, page 329]).


4E: Stultz's integrated theory: Stultz [1988] presents a formal model that predicts a roof-shaped relation between managerial ownership and financial performance. The model is integrating the takeover premium argument and the entrenchment argument into a single theory.


4F: Morck et al.'s combined argument: Morck, Shliefer and Vishny [1988] argue that the performance effect of the incentive alignment argument dominates the performance effect of the entrenchment argument for low levels of managerial ownership. For higher levels (about 5% managerial ownership) the picture is reversed and for still higher levels (about 30%) the picture is reversed back once again. View an exhibition on this argument.


4G: Monitoring argument: Large owners or block owners may be more capable of monitoring and controlling the management thereby perhaps contributing to corporate performance (Shliefer and Vishny [1986, and 1997, page 754]).


15) From ownership structure to incentive based compensation

15A: When managers of large firms hold significant equity stakes the question of these managers' remuneration may become less important since the majority of their income would come from their equity stakes (Mehran [1995, page 173]).


13) From ownership structure to decision system

13A: Large shareholders may be represented in the board of directors or otherwise influence the firmís decision process.


23) From ownership structure to market for corporate control

23A: Higher managerial ownership decreases the chance that hostile takeovers are successful (Stulz [1988]).


27) From ownership structure to market for management services

27A: Higher managerial ownership means that it is less likely that the market for management services will function (Morck, Shleifer and Vishny [1988a]).

29) From ownership structure to performance monitoring system

29A: The functioning of a performance monitoring system, such as the public stock market, may depend on the ownership structure. For example, on one hand, extremely dispersed ownership may result in more speculative prices because of a lack of informed investors, but on the other hand an extremely concentrated ownership structure could also cause speculative prices because of too little market liquidity. Such distortions of market valuation may in turn result in a rise in the firmís cost of capital. More info here.


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