Gao, C. & Johnston, M. (2025). Forthcoming in the Review of Corporate Finance Studies
Abstract: We empirically study the relation between managerial ownership and firm performance in a unique private firm setting. The simplicity of the ownership structure and nature of our sample firms helps isolate the incentive-aligning effect of managerial ownership from the influence of other effects. We find that managerial ownership is positively associated with firm performance. This positive association is concave but not reversed as ownership increases, indicating a diminishing effect of ownership on performance. We use managerial effort and a change of corporate policy to further mitigate the endogeneity concerns. Our findings support managerial ownership as an effective incentive-aligning tool.