The impacts of managerial and institutional ownership on firm performance

The role of stock price informativeness and corporate governance

Ming Yan William Cheung, Scott Fung, Shih Chuan Tsai

Research output: Contribution to journalArticle

Abstract

This paper provides new evidence on the relations between managerial and institutional ownerships and firm performance. These relations are found to be affected by firm's stock price informativeness and corporate governance. Based on a sample of US firms from NYSE, AMEX, and NASDAQ between 1989 and 2006, we document three important findings. First, managerial ownership and firm future performance are non-linearly related; the positive relation is stronger for firms with less informative prices or more agency problems. This finding suggests that poor governance and uninformative price increase the importance of managerial value creation for their firms by improving internal governance. Second, institutional ownership has a significant positive impact on firm future performance, with larger impact for firms with less informative prices or good governance. However, institutional ownership, which reflects external monitoring, has a weaker positive effect compared to managerial ownership, which controls for internal governance. Third, the interaction between managerial ownership and institutional ownership has a significant positive impact on firm future performance, suggesting that there are synergistic effects of internal and external corporate governance mechanisms in improving firm value.

Original languageEnglish
Pages (from-to)115-127
Number of pages13
JournalCorporate Ownership and Control
Volume6
Issue number4 A
Publication statusPublished - 2009
Externally publishedYes

Fingerprint

Price informativeness
Institutional ownership
Managerial ownership
Firm performance
Stock prices
Corporate governance
Internal governance
Agency problems
External monitoring
Interaction
Firm value
Corporate governance mechanisms
Governance
Managerial values
New York Stock Exchange
Value creation

Keywords

  • Corporate governance
  • Institutional ownership
  • Managerial ownership
  • Stock price informativeness

ASJC Scopus subject areas

  • Business, Management and Accounting(all)

Cite this

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abstract = "This paper provides new evidence on the relations between managerial and institutional ownerships and firm performance. These relations are found to be affected by firm's stock price informativeness and corporate governance. Based on a sample of US firms from NYSE, AMEX, and NASDAQ between 1989 and 2006, we document three important findings. First, managerial ownership and firm future performance are non-linearly related; the positive relation is stronger for firms with less informative prices or more agency problems. This finding suggests that poor governance and uninformative price increase the importance of managerial value creation for their firms by improving internal governance. Second, institutional ownership has a significant positive impact on firm future performance, with larger impact for firms with less informative prices or good governance. However, institutional ownership, which reflects external monitoring, has a weaker positive effect compared to managerial ownership, which controls for internal governance. Third, the interaction between managerial ownership and institutional ownership has a significant positive impact on firm future performance, suggesting that there are synergistic effects of internal and external corporate governance mechanisms in improving firm value.",
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