Several studies have examined the relationship between managerial ownership and firm
performance/value (e.g., [Journal of Financial Economics 20 (1988) 293; Journal of
Financial Economics 27 (1990) 595; Journal of Corporate Finance 5 (1999) 79]). Using
different samples, these studies provide general support for the argument that increases
in managerial ownership create countervailing interest alignment and entrenchment
effects, leading to a nonlinear relationship
between managerial ownership and firm performance. However, the actual form of this
nonlinear relationship differs across the studies.
The present paper examines the relationship between managerial ownership and performance
for high R&D firms that are listed on the NYSE, AMEX and NASDAQ. We find that Tobin’s
Q initially declines with managerial ownership, then increases, then declines again
and, finally, increases again—a W-shaped relationship. The findings from our
study point to the importance of industry effects in the relationship between managerial
ownership and firm performance.