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Structural Models and Endogeneity in Corporate Finance: The Link Between Managerial Ownership and Corporate Performance
Coles, Jeffrey L. Lemmon, Michael L. Meschke, Felix
Coles, Jeffrey L.
Lemmon, Michael L.
Meschke, Felix
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Abstract
This paper presents a parsimonious, structural model that isolates primary economic determinants of
the level and dispersion of managerial ownership, firm scale, and performance and the empirical
associations among them. In particular, variation across firms and through time of estimated
productivity parameters for physical assets and managerial input and corresponding variation in optimal
compensation contract and firm size combine to deliver the well-known hump-shaped relation between
Tobin's Q and managerial ownership. To assess the effectiveness of standard econometric approaches to
the endogeneity problem, we apply those remedies to panel data generated from the model. The
unfortunate conclusion is that, at least in the ownership-performance context, proxy variables, fixed
effects, and instrumental variables do not generally provide reliable solutions to simultaneity bias.
Note: Previously titled "Structural Models and Endogeneity in Corporate FinanceStructural Models and
Endogeneity in Corporate Finance: The Link Between Managerial Ownership and Corporate
Performance"
Description
NOTICE: this is the author’s version of a work that was accepted for publication in Journal of Financial
Economics. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Financial Economics, Volume 103, Issue 1, January 2012. DOI:10.1016/j.jfineco.2011.04.002.
Date
2012-01
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Elsevier
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Keywords
Corporate governance, Managerial ownership, Executive compensation, Corporate performance, Structural model, Endogeneity
Citation
Jeffrey L. Coles, Michael L. Lemmon, J. Felix Meschke, Structural models and endogeneity in corporate
finance: The link between managerial ownership and corporate performance, Journal of Financial
Economics, Volume 103, Issue 1, January 2012, Pages 149-168, ISSN 0304-405X, 10.1016/j.jfineco.2011.04.002.