Management Ownership and Market Valuation

Objective of Research: The author’s are trying to find an empirical basis for explaining market valuation as measured by Tobin’s Q and the composition of shareholders, specifically managements ownership. 

Methodology: Empirical Analysis.

Main Findings: Throughout the paper all variables give a similar result as depicted in the picture below.  Initial increases in Tobin’s Q can be explained by greater incentives to maximize the value of the firm.  Following this initial increase in the 0% to 5% range, Tobin’s Q declines for each 1% increase in ownership up to the 25% threshold.  This can be explained by the entrenchment hypothesis which states that as a manager increases their ownership of a firm they can effectively secure their own employment.  After this period of decline Tobin’s Q increases for every 1% change in ownership but at a rate slower then the initial increase of Tobin’s Q between 0% and 5%.  This second increasing period can be explained by the convergence-of-interest hypothesis which states there is a positive relationship between managements ownership and market value.