Hostname: page-component-78c5997874-g7gxr Total loading time: 0 Render date: 2024-11-15T07:53:58.226Z Has data issue: false hasContentIssue false
  • English
  • Français

Managerial Entrenchment and Firm Value: A Dynamic Perspective

Published online by Cambridge University Press:  24 November 2015

Xin Chang  and
Hong Feng Zhang
Xin Chang
Affiliation:
changxin@ntu.edu.sg, Nanyang Technological University, Nanyang Business School, Singapore, and University of Cambridge
Hong Feng Zhang*
Affiliation:
hong.zhang@deakin.edu.au, Deakin University, Deakin Business School, Geelong, Australia.
*
*Corresponding author: hong.zhang@deakin.edu.au
Get access Rights & Permissions [Opens in a new window]

Abstract

We examine the impact of managerial entrenchment on firm value using a dynamic model with firm fixed effects. To estimate the model, we employ the long-difference technique, which is shown by our simulation to deliver the least biased estimates. Based on a large sample of U.S. companies, we document a significantly negative and causal effect of managerial entrenchment on firm value after taking into account omitted variables, reverse causality, and highly persistent endogenous variables. Additional analysis suggests that the causality running from managerial entrenchment to firm value is more pronounced than that for reverse causality.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 50 , Issue 5 , October 2015 , pp. 1083 - 1103
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2015 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Alonso-Borrego, C., and Arellano, M.. “Symmetrically Normalized Instrumental-Variable Estimation Using Panel Data.” Journal of Business and Economic Statistics, 17 (1999), 36–49.Google Scholar
Antoniou, A.; Guney, Y.; and Paudyal, K.. “The Determinants of Capital Structure: Capital Market-Oriented versus Bank-Oriented Institutions.” Journal of Financial and Quantitative Analysis, 43 (2008), 59–92.Google Scholar
Arellano, M., and Bover, O.. “Another Look at the Instrumental Variable Estimation of Error-Components Models.” Journal of Econometrics, 68 (1995), 29–51.CrossRefGoogle Scholar
Bebchuk, L.; Cohen, A.; and Ferrell, A.. “What Matters in Corporate Governance?” Review of Financial Studies, 22 (2009), 783–827.CrossRefGoogle Scholar
Bebchuk, L.; Cohen, A.; and Wang, C.. “Learning and the Disappearing Association between Governance and Returns.” Journal of Financial Economics, 108 (2013), 323–348.Google Scholar
Berger, P. G.; Ofek, E.; and Yermack, D. L.. “Managerial Entrenchment and Capital Structure Decisions.” Journal of Finance, 52 (1997), 1411–1438.Google Scholar
Blundell, R., and Bond, S.. “Initial Conditions and Moment Restrictions in Dynamic Panel Data Models.” Journal of Econometrics, 87 (1998), 115–143.Google Scholar
Chi, J. D.“Understanding the Endogeneity between Firm Value and Shareholder Rights.” Financial Management, 34 (2006), 65–76.Google Scholar
Cremers, M., and Ferrell, A.. “Thirty Years of Shareholder Rights and Firm Value.” Journal of Finance, 69 (2014), 1167–1196.Google Scholar
Fama, E., and French, K.. “Industry Costs of Equity.” Journal of Financial Economics, 43 (1997), 153–193.Google Scholar
Fama, E., and MacBeth, J.. “Risk, Return and Equilibrium: Empirical Tests.”.Journal of Political Economy, 81 (1973), 607–636.Google Scholar
Gompers, P.; Ishii, J.; and Metrick, A.. “Corporate Governance and Equity Prices.” Quarterly Journal of Economics, 118 (2003), 107–155.Google Scholar
Goto, S.; Watanabe, M.; and Xu, Y.. “Strategic Disclosure and Stock Returns: Theory and Evidence from US Cross-Listing.” Review of Financial Studies, 22 (2009), 1585–1620.Google Scholar
Grinstein, Y., and Michaely, R.. “Institutional Holdings and Payout Policy.” Journal of Finance, 60 (2005), 1389–1425.Google Scholar
Hahn, J.; Hausman, J.; and Kuersteiner, G.. “Long Difference Instrumental Variables Estimation for Dynamic Panel Models with Fixed Effects.” Journal of Econometrics, 140 (2007), 574–617.Google Scholar
Holtz-Eakin, D.; Newey, W.; and Rosen, H. S.. “Estimating Vector Autoregressions with Panel Data.” Econometrica, 56 (1988), 1371–1395.Google Scholar
Hsiao, C. Analysis of Panel Data, 2nd ed.Cambridge, UK: Cambridge University Press (2003).Google Scholar
Huang, R., and Ritter, J. R.. “Testing Theories of Capital Structure and Estimating the Speed of Adjustment.” Journal of Financial and Quantitative Analysis, 44 (2009), 237–271.Google Scholar
Lehn, K.; Patro, S.; and Zhao, M.. “Governance Indices and Valuation Multiples: Which Causes Which?” Journal of Corporate Finance, 13 (2007), 907–928.Google Scholar
Lemmon, M. L.; Roberts, M. R.; and Zender, J. F.. “Back to the Beginning: Persistence and the Cross-Section of Corporate Capital Structure.” Journal of Finance, 63 (2008), 1575–1608.Google Scholar
Love, I., and Zicchino, L.. “Financial Development and Dynamic Investment Behavior: Evidence from Panel VAR.” Quarterly Review of Economics and Finance, 46 (2006), 190–210.Google Scholar
Maddala, G. S., and Wu, S.. “A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test.” Oxford Bulletin of Economics and Statistics, 61 (1999), 631–652.Google Scholar
Nickell, S.“Biases in Dynamic Models with Fixed Effects.” Econometrica, 49 (1981), 1417–1426.Google Scholar
Phillips, P. C. B., and Sul, D.. “Bias in Dynamic Panel Estimation with Fixed Effects, Incidental Trends and Cross Section Dependence.” Journal of Econometrics, 137 (2007), 162–188.Google Scholar
Windmeijer, F. “A Finite Sample Correction for the Variance of Linear Efficient Two-Step GMM Estimators.” Journal of Econometrics, 126 (2005), 25–51.Google Scholar
Wintoki, M. B.; Linck, J. S.; and Netter, J. M.. “Endogeneity and the Dynamics of Internal Corporate Governance.” Journal of Financial Economics, 105 (2012), 581–606.Google Scholar
Ziliak, J. P.“Efficient Estimation with Panel Data When Instruments Are Predetermined: An Empirical Comparison of Moment-Condition Estimators.” Journal of Business and Economic Statistics, 15 (1997), 419–431.Google Scholar