Managerial ownership and the performance of firms: Evidence from the UK

Given the governance issues arising from the separation of ownership from control, the ability to align managerial and shareholder interests via the managerial ownership of equity is an important topic of inquiry. The findings of the primarily US based literature suggest that management is aligned at low and possibly high levels of ownership but is entrenched (pursuing self interests) at intermediate ownership levels. This paper extends the US based literature in a number of important ways. First, the analysis is extended to the UK where there are important differences, as compared to the US, in the governance system. A comparative analysis of key differences between the US and UK governance systems suggest that management should become entrenched at higher levels of ownership in the UK. Some of the reasons for this suggestion are that in the UK management do not have the same freedom as their US counterparts to mount takeover defenses and institutional investors in the UK are more able to co-ordinate their monitoring activities. The empirical results of the paper confirm that UK management become entrenched at higher levels of ownership than their US counterparts. Second, the results from extending the analysis to consider different measures of firm performance and a more generalized form of the relationship confirm the general finding of the US literature of a non-linear relationship between firm performance and managerial ownership.