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The Interrelationship Between Managerial Ownership and Board Structure


  • He thanks Yakov Amihud, Lorenzo Caprio, Larry Lang, an anonymous referee, and seminar participants at Bilkent University, Hacettepe University, Cass Business School, the 2000 Financial Management Association meetings, and the 2001 European Financial Management Association meeting. He also thanks Marra Faccio for her significant contribution to an earlier version of the paper. The usual disclaimer applies.

* Address for correspondence: M. Ameziane Lasfer, 106 Bunhill Row, London EC1Y 8TZ, UK.


Abstract:  The paper tests the hypothesis that high managerial ownership entrenches managers by allowing the CEO to create a board that is unlikely to monitor. The results show a strong negative relationship between the level of managerial ownership and corporate governance factors, such as, the split of the roles of the CEO and the Chairman, the proportion of non-executive directors, and the appointment of a non-executive director as a Chairman. I also find that companies with low managerial ownership are more likely to change their board structure to comply with the Cadbury (1992) recommendations. The results suggest that managers, through their high ownership, choose a board that is unlikely to monitor. Overall, the findings cast doubt on the effectiveness of the board as an internal corporate governance mechanism when managerial ownership is high.