Why Are Firms With More Managerial Ownership Worth Less?

Ruediger Fahlenbrach & Kornelia Fabisik © 2020 EPFL

Ruediger Fahlenbrach & Kornelia Fabisik © 2020 EPFL

Professor Rüdiger Fahlenbrach’s and former EPFL PhD student Kornelia Fabisik’s work forthcoming in the Journal of Financial Economics.

Many investors and governance experts believe that “skin in the game” of managers, i.e. substantial stock and option ownership of top management, is good for firm value. Managers who own a lot of stock have aligned incentives with shareholders and will work hard to maximize shareholder value. However, if management has too much ownership, it may take decisions that are detrimental to minority shareholders and good for themselves.

The academic world has provided evidence consistent with these beliefs. An important and well-documented result in corporate finance research is that firm value is positively correlated with managerial ownership over some range of ownership and then, beyond that range, becomes negatively correlated. Several theory papers model the tension between managerial ownership and incentives and predict such a concave relation: It is good when managers have some skin in the game, but if they own too many shares, they become entrenched.

A limitation of this evidence is that it uses databases that include few small firms and few young firms. In our paper, we build a database that is much richer than any database used in the literature. With this database, we find that for many firms, managerial ownership by managers is high simply because the firm’s stock has not been liquid enough for managers to sell shares. These firms have both high managerial ownership and low value. Our evidence shows that when considering the implications of managerial ownership, it is important to take into account that there are costs of reducing managerial ownership for managers and that these costs may lead a firm to have high managerial ownership for reasons other than the firm wanting managers to have skin in the game.

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  • Kornelia Fabisik, former Swiss Finance Institute doctoral student at Ecole Polytechnique Fédérale de Lausanne and now Assistant Professor at Frankfurt School of Finance & Management
  • Rüdiger Fahlenbrach, Swiss Finance Institute Senior Chair at Ecole Polytechnique Fédérale de Lausanne
  • René M. Stulz, Everett D. Reese Chair of Banking and Monetary Economics, Fisher College of Business, The Ohio State University
  • Jérôme P. Taillard, Associate Professor of Finance, Babson College


Fabisik, Kornelia and Fahlenbrach, Rüdiger and Stulz, Rene M. and Taillard, Jérôme, Why Are Firms With More Managerial Ownership Worth Less? (December 4, 2018). Fisher College of Business Working Paper No. 2018-03-024, Charles A. Dice Center Working Paper No. 2018-24, Swiss Finance Institute Research Paper No. 18-75, European Corporate Governance Institute (ECGI) - Finance Working Paper No. 587/2018, Available at SSRN: https://ssrn.com/abstract=3295797 or http://dx.doi.org/10.2139/ssrn.3295797