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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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- Copyright 1997-2010, ViamInvest. Reproduced with permission of the copyright owner. Further reproduction prohibited without permission. Legal notice. |
