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Managerial Equity Ownership and the Demand for Outside Directors
Author(s) -
Peasnell Kenneth V.,
Pope Peter F.,
Young Steven
Publication year - 2003
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/1468-036x.00217
Subject(s) - incentive , equity (law) , stock (firearms) , business , substitution (logic) , linkage (software) , microeconomics , on demand , common stock , accounting , economics , econometrics , monetary economics , commerce , mechanical engineering , programming language , biochemistry , chemistry , political science , computer science , law , gene , engineering , paleontology , context (archaeology) , biology
This paper examines the linkage between the use of outside directors and managerial ownership. We conjecture there are two linkages: the standard incentive‐alignment demand for monitoring when managers own little stock and an entrenchment‐amelioration demand when managerial stock ownership is high. As a consequence, we predict the association between managerial ownership and board composition will be nonlinear (U‐shaped if the entrenchment effect is sufficiently pronounced). Using UK data, we find that both quadratic and logarithmic models outperform the simple linear relationship assumed in prior research and that the substitution between managerial ownership and board composition is stronger than hitherto supposed.