Ex Ante Effects of Ex Post Managerial Ownership

45 Pages Posted: 8 Aug 2006

See all articles by Francesca Cornelli

Francesca Cornelli

London Business School; Centre for Economic Policy Research (CEPR)

David D. Li

Hong Kong University of Science & Technology (HKUST) - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: February 2007

Abstract

This paper highlights the trade-off between the need to restructure a company and the need to provide managers with appropriate incentives to run it after the restructuring. In order to provide incentives, it is optimal to let managers acquire equity in the firm. However, the expectations to be able to buy shares in the future may create ex-ante incentives to delay restructuring. This effect is particularly important for events where managers can acquire a substantial number of shares, such as privatizations or MBOs. In equilibrium, the shares are not underpriced, but the delay in restructuring which took place in the period before reduces the value of the company. We report empirical evidence on MBOs and privatizations consistent with the model in this paper.

Keywords: Managers incentives, privatizations, management buy-outs

JEL Classification: J33, G34, P34

Suggested Citation

Cornelli, Francesca and Li, David Daokui, Ex Ante Effects of Ex Post Managerial Ownership (February 2007). Available at SSRN: https://ssrn.com/abstract=922089 or http://dx.doi.org/10.2139/ssrn.922089

Francesca Cornelli (Contact Author)

London Business School ( email )

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HOME PAGE: http://www.lbs.ac.uk/faculty/fcornelli/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

David Daokui Li

Hong Kong University of Science & Technology (HKUST) - Department of Economics ( email )

Clear Water Bay
Kowloon, Hong Kong
China
(852) 2358-7610 (Phone)
(852) 2358-2084 (Fax)

HOME PAGE: http://home.ust.hk/~davidli

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