Structural models and endogeneity in corporate finance: The link between managerial ownership and corporate performance

This paper presents a parsimonious, structural model that isolates primary economic determinants of the level and dispersion of managerial ownership, firm scale, and performance and the empirical associations among them. In particular, variation across firms and through time of estimated productivit...

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Bibliographic Details
Published in:Journal of financial economics 2012, Vol.103 (1), p.149-168
Main Authors: Coles, Jeffrey L., Lemmon, Michael L., Felix Meschke, J.
Format: Article
Language:English
Subjects:
Business ownership
Compensation
Corporate finance
Corporate governance
Corporate performance
Econometrics
Endogeneity
Error
Executive compensation
Managerial ownership
Organizational effectiveness
Ownership and control
Panel data
Performance evaluation
Structural model
Studies
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Summary:This paper presents a parsimonious, structural model that isolates primary economic determinants of the level and dispersion of managerial ownership, firm scale, and performance and the empirical associations among them. In particular, variation across firms and through time of estimated productivity parameters for physical assets and managerial input and corresponding variation in optimal compensation contract and firm size combine to deliver the well-known hump-shaped relation between Tobin's Q and managerial ownership. To assess the effectiveness of standard econometric approaches to the endogeneity problem, we apply those remedies to panel data generated from the model. The unfortunate conclusion is that, at least in the ownership–performance context, proxy variables, fixed effects, and instrumental variables do not generally provide reliable solutions to simultaneity bias.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2011.04.002