Understanding the determinants of managerial ownership and the link between ownership and performance

Both managerial ownership and performance are endogenously determined by ex ogenous land only partly observed) changes in the firm's contracting enviro nment. We extend the cross-sectional results of Demsetz and Lehn (1985) (Jo urnal of Political Economy, 93, 1155-1177) and use panel data to show that managerial ownership is explained by key variables in the contracting envir onment in ways consistent with the predictions of principal-agent models. A large fraction of the cross-sectional variation in managerial ownership is explained by unobserved firm heterogeneity. Moreover, after controlling bo th for observed firm characteristics and firm fixed effects, we cannot conc lude (econometrically) that changes in managerial ownership affect firm per formance. (C) 1999 Elsevier Science S.A. All rights reserved.