The effect of CEO ownership & CEO entrenchment on firm value. (c2011)

Abstract

We investigate the relation between firm value, CEO equity ownership and managerial entrenchment. Our results concerning the coefficients and their respective signs are consistent with the existing literature. However, there is no evidence of a specific nonmonotonic relation between Tobin’s Q and percentage of CEO equity ownership. This paper also examines the marginal impact of investment spending on capital and research on firm value under different governance schemes. Though the sign and significance of management entrenchment has the predicted negative impact on firm value, the marginal impacts of capital expenditure, research and development spending on firm value increase for firms with highly entrenched managers (low shareholder rights), as compared to firms with low management entrenchment (high shareholder rights). That said, such an increase in marginal effect, of capital and research, most likely to be the result of under spending on such value enhancing activities. This result suggests that the selection of investment opportunities, firm’s cash holding, and efficiency of internal capital markets could be a major source of friction between management and shareholders.