Managerial Ownership and Firm Performance: Evidence from the 2003 Tax Cut

Abstract

Causal evidence on the effect of managerial ownership on firm performance is elusive due to a lack of within-firm variation and credible empirical designs. We identify this causal effect by exploiting the 2003 Tax Cut as a natural experiment, which increased net-of-tax effective managerial ownership, and examine changes in Tobin's Q as well as alternative measures of operating performance. Consistent with theoretical predictions, our difference-in-difference empirical design uncovers a hump-shaped improvement in firm performance concerning the level of managerial ownership. The increase in performance is more pronounced for firms with more severe agency problems or under weaker governance, further demonstrating managerial ownership as the underlying channel.

Keywords: Firm valuation, Director and officer ownership, Corporate governance, Institutional ownership concentration

JEL Classification: M48, G34, G32, D86