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Table 2: Variable definitions and theoretical justifications

 

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Table 2, Part 2: The ownership equation, EQ2

Variable name

Definition, theoretical justification and data source

OWi,t

Managerial ownership

A generic abbreviation for managerial ownership measured at time t for firm i. One of the following two specific measures is applied:  ownership by all officers and directors and insider ownership (see below). As a dependent variable in EQ2 it enters the regression using the following logarithmic transformation: .

OffDirOwi,t

Officer and director ownership

This is calculated as total shares held by officers and directors as a group as reported in the Proxy report divided by common shares outstanding. Common shares outstanding are taken in their entirety from the balance sheet of a 10-K or 10-Q filing.IV Data source: SEC-Piranhaweb.

InsOwi,t

Insider ownership

This is calculated as total shares held by the seven largest corporate insiders as reported from ‘form 3 and form 4 statements’ and divided by common shares outstanding. Insider shares held is the total number of shares currently held by a particular officer, director, beneficial owner and principal stockholder owning 10 percent or more of the company stock.  Officers, directors and beneficial owners are only included if they hold at least 1000 shares.IV Data source: SEC-Piranhaweb.

Expected performance

This variable is either measured by Recon (consensus stock recommend) or by N5YrEPSG (next five-year growth in earnings per share). For a detailed discussion of these measures and why they may be proxies for the managers’ performance expectations, see Chapter 5, Section 3.3. The measurement details are given below in this table, Part 3. Here it suffices to say that as an explanatory variable in the ownership equation its parameter should be significantly negative (positive) when measured by Recon (N5YrEPSG) to support the insider reward or the insider investment argument of Hypothesis 4 as explained in Chapter 2, Section 2.4. Get dissertation.

Pi,t-1

Past performance

A generic abbreviation for financial performance measured at time t-1 for firm i. One of the following two specific measures is applied: three-year average return on assets and two-year return on assets (see below).

3YrAvgRonAi,t-1

Three-year average return on assets

The three-year average return on assets is simply calculated as (RonAi,t-1 + RonAi,t-2+ RonAi,t-3)/3. For a definition of RonA see above. The parameter to 3YrAvgRonA should be significantly positive according to the reward argument of Hypothesis 4 as explained in Chapter 2, Section 2.4. Get dissertation. Data source: Worldscope-Piranhaweb.

2YrAvgRonAi,t-1

Two-year average return on assets

Same as 3YrAvgRonA above apart from limiting the relevant past to two years instead of three years. Data source: Worldscope-Piranhaweb.

MarkCapi,t

Market capitalization

MarkCap is the year end market capitalization of all outstanding shares all types included.I As an explanatory variable in EQ2 it is hypothesized that higher market value is negatively related to managerial ownership for the following three reasons: 1) wealth constraints saying that as value increases it becomes increasingly difficult for managers to afford high ownership stakes; 2) control argument saying that, ‘…a given degree of control generally requires a smaller share of the firm the larger is the firm.’, quoted Demsetz and Lehn [1985, page 1158]; and 3) risk argument saying that as stock value increases the risk adverse managers need to adjust their personal portfolio selling stocks and buying other assets to keep it diversified. Data source: Worldscope-Piranhaweb.

DIndust2i,t

Sector code dummies

This is another set of industry dummies from I/B/E/S sector code. The classification contains 11 sectors equal to (11-1) dummies; in particular, finance, healthcare, consumer non-durables, consumer services, consumer durables, energy, transportation, technology, basic industries, capital goods and public utilities.II It is hypothesized that ownership could be determined by a rough classification of industries because of differences in the legal regulation of these industries (see Demsetz and Lehn [1985, page 1161]). Data source: I/B/E/S-Piranhaweb.

DExchangei,t

Stock exchange dummy

For a definition, see above in this table, Part 1. It is hypothesized that the different codes of conduct that each stock exchange applies might have an impact on the managerial ownership. For instance, firms that prefer to disclose as little as possible about ownership may prefer exchanges that does not add additional disclosure requirement to the ordinary legal rules about ownership disclosure.

DIncorpi,t

Dummy for country of incorporation

For a definition, see above in this table, Part 1. It is hypothesized that the country of incorporation could determine managerial ownership through differences in corporate laws as well as tax laws that may create different incentives and requirements for managerial ownership.

 

Table 2, Part 3: The expectations equation, EQ3

Variable name

Definition, theoretical justification and data source

Expected performance

A generic abbreviation for financial performance at time t+1 as expected at time t for firm i. One of the following two measures is applied: consensus stock recommendations and expected average growth in earnings per share five-years ahead (see below).

ReConi,t

Consensus stock recommendation

ReCon is the consensus stock recommendation calculated as the mean of several similarly scaled grades of common stock delivered by stock analysts from various investment banks to I/B/E/S. In particular, common stock is graded on a discrete scale from 1 to 5, where mark 1 is a strong buy, 2 is a buy, 3 is a hold, 4 is a sell and 5 is a strong sell.II Data source: I/B/E/S-Piranhaweb.

 

N5YrEPSGi,t

Next five-year EPS growth

This is another I/B/E/S earnings estimate suggesting the expected next five-year growth rate in earnings per share.III Data source: Compact D online, SEC- Global Access.

Pi,t

Performance

The financial performance is measured by either the market-to-book ratio or by return on assets. These measures are defined above in this table, Part 1. As an explanatory variable in the expectations equation it is expected to be significantly positive if the performance expectations are measured by N5YrEPSG and significantly negative if it is measured by ReCon. This relation is based on a theory of adaptive performance expectations that is believed to be part of a more complex story about the formation of expectations. It should also be noted that such a relation supports the idea of endogeneity of managerial ownership and financial performance because EQ1 and EQ2 alone do not form a simultaneous system. More details this Chapter, Section 2.1. Get dissertation.

DIndust1i,t

For a definition and justification, see above in this table, Part 1.

DExchangei,t

For a definition and justification, see above in this table, Part 1.

DIncorpi,t

For a definition and justification, see above in this table, Part 1.