Role of Management with Diffuse Ownership
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Role of management with diffuse ownership:
• Diffuse stock ownership
– Limited liability public corporation
– Diffuse ownership of voting equity shares
– Large number of individual share owners
– Separation of ownership and control
• Operations of firm are conducted and controlled by managers without major stock ownerships
• Conflicts of interest arise between owners and managers
OWNERSHIP CONCENTRATION:
• Equity ownership by managers must balance
– Convergence or alignment of interests
– Entrenchment considerations — managerial ownership and control of voting rights may allow pursuit of self-interest
• Ownership and performance
– Stulz (1988)
• Model in which at low levels of management ownership, increased equity holdings improve convergence — enhance firm value
• At higher levels of insider ownership, managerial entrenchment prevents takeovers — decrease firm value
– Morck, Schleifer, and Vishny (MSV) (1988)
• Study based on 1980 data
• Performance (measured by q-ratio) related to management or insider ownership percentages
– Ownership concentration increased from 0 to 5%
• Performance improved
• Alignment-of-interest effect
• Direction of causality may be reversed — high performance firms more likely to give managers stock bonuses
• 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%
• Performance deteriorated
• Management entrenchment dampens performance
Role of management with diffuse ownership:
• Diffuse stock ownership
– Limited liability public corporation
– Diffuse ownership of voting equity shares
– Large number of individual share owners
– Separation of ownership and control
• Operations of firm are conducted and controlled by managers without major stock ownerships
• Conflicts of interest arise between owners and managers
OWNERSHIP CONCENTRATION:
• Equity ownership by managers must balance
– Convergence or alignment of interests
– Entrenchment considerations — managerial ownership and control of voting rights may allow pursuit of self-interest
• Ownership and performance
– Stulz (1988)
• Model in which at low levels of management ownership, increased equity holdings improve convergence — enhance firm value
• At higher levels of insider ownership, managerial entrenchment prevents takeovers — decrease firm value
– Morck, Schleifer, and Vishny (MSV) (1988)
• Study based on 1980 data
• Performance (measured by q-ratio) related to management or insider ownership percentages
– Ownership concentration increased from 0 to 5%
• Performance improved
• Alignment-of-interest effect
• Direction of causality may be reversed — high performance firms more likely to give managers stock bonuses
• 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%
• Performance deteriorated
• Management entrenchment dampens performance