Monday, April 20, 2015 | 2:00pm–3:30pm | Room 335, HSBC Business School Building

Abstract

Evidence on the causal effect of managerial ownership on firm performance is elusive due to a lack of within-firm variations and credible empirical designs. We identify this causal effect by exploiting the 2003 Tax Cut as a natural experiment, which increased the net-of-tax effective managerial ownership. Consistent with predictions from agency theory, our difference-in-difference empirical design uncovers a significant and hump-shaped improvement in firm performance with respect to the level of managerial ownership. The increase in performance is more pronounced for firms subject to more severe agency problems as well as firms under weak alternative governance mechanisms, further demonstrating managerial ownership incentive as the underlying channel for our results.