Management ownership and market valuation: An empirical analysis

The reduced-form relationship between management ownership and market valuation of the firm, as measured by Tobin's Q, is investigated by using a 1980 cross section of 371 Fortune 500 firms supplied by Corporate Data Exchange. Stockholders who belong to the board of directors are identified, except for those whose stakes are below .2%. The relationship between ownership and market valuation of the firm's assets is examined. Piecewise linear regressions are estimated, allowing for 2 changes in the slope coefficient on board ownership. To insure robust results, a wide variety of specifications is estimated, allowing for slopes to change at different points. Evidence is found of a significant nonmonotonic relationship in the sample. Tobin's Q increases, then decreases, and then increases slightly as ownership by the board of directors rises. There is evidence that, for older firms, Q is lower when the firm is managed by a member of the founding family than when managed by an officer who is unrelated to the founder.