Page info: *Author: Mathiesen, H. *Document version: 2.0. *Copyright 1997-2017, ViamInvest. Legal notice.


Exhibition: The argument by Morck et al. [1988]


Introduction: The hypothesis in the paper by Morck et al. [1988] is not based on a formal model. Instead, they simply take the incentive alignment theory and add it to a general entrenchment argument as illustrated in the figure below. As shown in this figure the Morck et al. argument does not predict a ‘clean’ bell-shaped relation between performance and ownership since performance starts to increase again with a sufficiently high level of ownership concentration. The reason for this prediction is that it fits the empirical findings of their paper. Morck et al.’s interpretation of their findings is that the entrenchment effect will dominate the incentive effect only for medium concentrated levels of management ownership. This is so because for low levels of managerial ownership it might not be reasonable to think that the manager is entrenched at all since his ownership stake is too small to give him any control whatsoever. Furthermore, for very high levels of managerial ownership it seems reasonable that the manager may be 100% entrenched since he will be 100% in control for all very high levels of ownership. As a result, the entrenchment effect will only have an impact on performance for changes in the medium-concentration levels of ownership.


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