on 28-Oct-2021 (Thu)

Using more than 50,0 0 0 firm-years from 1988 to 2015, we show that the empirical relation between a firm’s Tobin’s q and managerial ownership is systematically negative.

Better performing firms have more liquid equity, which enables firms and insiders to more easily sell shares after the IPO, and they also have a higher Tobin’s q.

earlier authors rarely question whether the empirical relation between firm value and managerial ownership is upward-sloping, at least over some range (additional evidence is provided by

With our sample, we find strong and robust evidence that the relation between firm value and managerial ownership is negative rather than positive and thus opposite to theoretical predictions and prior empirical findings

Yet, when we restrict our sample to the subset of larger firms similar to the samples used by McConnell and Servaes (1990) or MSV, we recover their findings of a positive relation between firm value and managerial ownership over some range of ownership

Managers own more shares at the initial public offering (IPO) than they typically want to own over time ( Helwege et al., 2007) . As a result, they want to decrease their ownership, but face frictions in doing so. The key friction we focus on is stock illiquidity. If a firm’s stock is illiquid, it takes time to sell large stakes and doing so may be expensive, so that managers may not be able to sell shares under conditions that are acceptable to them. Managers may also face other frictions than illiquidity in selling shares.

Empirical evidence shows that equity issuance is higher in periods of higher liquidity ( Hanselaar et al., 2019 ). Such share issuances dilute managerial ownership if insiders do not invest proportionally

The firms whose stock is liquid are typically successful, which means they are firms with a high Tobin’s q. Hence, high q firms tend to have low managerial ownership

This mechanism also explains why the results in the literature hold for large, highly liquid firms, but not for other firms as frictions in the adjustment of managerial ownership are not relevant for large liquid firms

The first one is the measure of Amihud (2002) and the second one is the measure developed by Fong et al. (2017) (FHT hereafter).

We view our transaction-based measures of liquidity as a proxy for the frictions that hinder management from sell- ing shares when they would do so absent these frictions. We split the sample between firms that have high past stock liquidity and firms that have low past stock liquidity. The frictions we focus on should be much less important, and perhaps immaterial, for the firms with high past stock liquidity.

We indeed find strong evidence that a firm’s current managerial ownership is a decreasing function of the number of high stock liquidity years for the firm, which are years in which managers could have decreased their ownership at lower cost. The evidence holds for both the Amihud and FHT liquidity measure.

Our results could be driven by insiders wanting to extract private benefits of control by keeping a large stake since the IPO, and not fostering the right conditions to increase liquidity or firm valuation. Although we cannot fully rule out this explanation, we offer two pieces of evidence that suggest extraction of private benefits is not the main driver of our results. First, we show that firms with high and low past liquidity ex post have similar levels of insider ownership at the IPO; and both reduce insider ownership over time, albeit one at a lower speed than the other. These results suggest that the two groups of firms are not fundamentally different in terms of insider ownership dynamics. The evidence also supports the view that insiders own more shares at the IPO than they want to own in the long run and that their stakes at the IPO are not determined by the anticipation of differing future

private benefits. Second, the negative relation between To- bin’s q and managerial ownership holds when we exclude firms with executives who may have the greatest ability to extract private benefits, the group of firms led by their founders

The introduction of decimalization in 2001, which affects large firms with small spreads but not smaller listed companies, provides a second shock to liquidity (e.g., Bessembinder, 2003 ; Furfine, 2003 ). 3