Reexamining the managerial ownership effect on firm value

Managerial ownership levels change slowly over time. The slow change masks a significant ownership effect when testing the relation between managerial ownership and firm value using firm fixed effects to control for unobserved firm heterogeneity because of much smaller within variation than between variation. I demonstrate that using pay-performance semi-elasticity as a measure of managerial ownership incentives results in meaningful changes within firm over time. The greater within firm variation amplifies the effect size and increases the power to detect a relation between managerial ownership and firm value in firm fixed effects regressions. Using pay-performance semi-elasticity, I find a significant hump shaped relation between managerial ownership and Tobin's Q in firm fixed effects regressions and two-stage least squares regressions with firm fixed effects to control for endogeneity. My results contradict the results of previous studies which find no relation between managerial ownership and firm value in firm fixed effects regressions.