Discussion Paper No.

593

MANAGEMENT OWNERSHIP AND FIRM’S VALUE:
AN EMPIRICAL ANALYSIS USING PANEL DATA

Sang-Mook Lee
andKeunkwan Ryu

September 2003

The Institute of Social and Economic Research
Osaka University
6-1 Mihogaoka, Ibaraki, Osaka 567-0047, Japan

Management Ownership and Firm's Value:
An Empirical Analysis using Panel Databy
Sang-Mook Lee
Samsung Research Institute of FinanceandKeunkwan Ryu1
ISER, Osaka University
andDepartment of Economics
Seoul National University
August 5, 2003

Abstract
Demsetz and Lehn (1985), Morck, Shleifer, and Vishny (1988), and McConnell andServaes (1990) report different empirical findings regarding ownership structure andcorporate profitability. In this paper, we re-estimate the relation between
management ownership and firm's value after controlling for the history ofmanagement ownership as well as inter-firm differences using panel data. Further,
we consider the possibility that the current ownership structure is jointly determinedwith the firm value, an endogeneity argument a la Demsetz (1983). We find that
history of the management ownership, not its current level, matters in determining
the firm value, which is consistent with information asymmetry arguments.
Keywords: convergence-of-interest, endogeneity, entrenchment, firm value,
information asymmetry, insider ownership, panel data
JEL Classification: C23, C81, D23

Keunkwan Ryu is the corresponding author. He is currently an Associate Professor, Department of
Economics, Seoul National University, Korea, and Visiting Foreign Scholar, ISER, Osaka University,
Japan. His mailing address is Department of Economics, Seoul National University, Seoul 151-742,
Korea, phone number is 82-2-880-6397, fax number is 82-2-886-4231, and email address is
ryu@snu.ac.kr.

1. Introduction
In his path breaking work, Demsetz (1983) argues that a firm's ownership
structure is endogenously determined to maximize its shareholders' interest.
Accordingly, Demsetz concludes that there is no relation between ownership structure
and profitability. Demsetz and Lehn (1985) present evidences supporting Demsetz's
arguments. They regress accounting profit rates of 511 U.S. companies in 1980 on
different measures of ownership concentration and they find no significant coefficient.
In contrast, two subsequent papers, Morck, Shleifer, and Vishny (1988) and
McConnell and Servaes (1990), report quite different findings. Morck, Shleifer, and
Vishny estimate a piece-wise linear regression in which the dependent variable is
Tobin's Q and the primary independent variable is the fraction of shares owned bycorporate management. Using a cross-section sample of 371 Fortune 500 firms for 1980,
they find that Q first rises as management ownership increases to 5%, then falls asownership increases to 25%, and then rises slightly at higher ownership levels. Whenthey use profit rates as an alternative dependent variable they find similar piece-wiselinear relationship, even though the statistical significance of the estimates is much
lower. They mention that their results appear at odds with the findings of Demsetz andLehn. They suggest that Demsetz and Lehn fail to capture the non-monotonic
relationship that they have found by estimating a mis-specified linear model rather thana piece-wise linear model.
McConnell and Servaes (1990) investigate the cross-sectional relation between
Tobin's Q and management equity ownership for a sample of 1,173 firms in 1976 andfor a sample of 1,093 firms in 1986 that are listed on either the New York Stock
Exchange or the American Stock Exchange. For both samples, they find a significant
curvilinear relation between Tobin’s Q and the management ownership. Q firstincreases, then decreases, as the shares become concentrated in the hands of managers
and members of the board of directors. They also mention that their results are
consistent with neither Demsetz’s (1983) theoretical arguments nor Demsetz and Lehn’s(1985) empirical findings. They do not offer any possible theoretical or empiricalexplanation for the inconsistency, though.
These three empirical results are mutually contradictory. How could theseconflicting results coexist side by side? In this paper, we re-investigate the relation
between management ownership and firm's value using panel data rather than crosssectional data. The advantage of using panel data is that we are able to control forunobservable firm-specific attributes and past history of insider ownership changes tobetter single out the relationship between insider ownership and the firm value.
According to Demsetz, insider ownership is endogenously determined tomaximize the firm value given firm-specific characteristics. If so, controlling forunobservable firm-specific effects and for ownership patterns in the past as well for theobservable characteristics, would mitigate the endogeneity problem of the current
ownership variable in determining the firm value. Also, by using panel data, we even

allow for the possibility that the ownership variable is still endogenous. Accounting for
endogeneity is easier in the panel data setting than in the cross-sectional data.
Note that all three of the previous studies use cross-sectional data. Crosssectional studies would make any sense at all only when the management shareholding
is stable over time. Seyhun (1992) reports that in spite of the increased statutory
sanctions of the 1980s on the insider trading, data show increases in volume andabnormal profits of insider trading over time. The management shareholding is notstable over time. Unlike cross-sectional data, panel data allows one to take into accountthe effect on the firm value of the history of management ownership changes.
We argue that the extent of insider trading and the changing pattern ofmanagement ownership have to be controlled to single out the relation between
management ownership and the firm value. Under information asymmetry between the
management and the outside investors, intensive insider trading raises the possibility
that the informed management exploits the uninformed outside investors. When we
include a variable measuring the extent of insider trading in the regression, we expect
its coefficient to be negative as a result. Outside investors take changes in the
management ownership between the previous year and the current year, as a credible
signal about the firm's future performance. When we include the change in the
management ownership in the regression, we expect its coefficient to be positive.
The above arguments imply that firms with identical management shareholding
at a specific time can display quite different corporate values. For example, consider
two firms with the same level of management shareholding. If one firm's management
reduces its shareholding recently, the firm's market value would be lower than that of
the other firm that has stable management shareholding. Without controlling for thehistory of management shareholdings, we face difficulties in identifying relation
between management shareholding and firm's value. Cross-sectional analyses do notaccount for the history of management shareholdings. Empirical findings in crosssectional studies much depend on the specific sample being used. We argue that thispartly explains why the afore-mentioned previous studies report mutually conflicting
results.
Another advantage of using panel data lies in that one can better control forunobservable inter-firm differences. Many of the firm characteristics are not observed,
but still important. Another possible explanation for differences among afore-mentioned
empirical results is that there may be unidentified, but important, inter-firm differences.
Panel data allow us to better control for unobserved inter-firm differences, enabling us
to better single out the relation between management ownership and firm's value.
Panel data analyses of this paper, by being able to control for unobservableinter-firm differences and history of management ownership, are expected to better
reveal the relationship between management ownership and the firm value. In this way,
we hope to see whose theory, Demsetz's or the others', is more appropriate.
The rest of the paper is organized as follows. Section 2 reviews the existingliterature on the relation between the management ownership and the firm value.
Section 3 draws testable hypotheses. Section 4 explains the data and presents theestimation results. Section 5 concludes the paper.
2. Ownership structure and corporate value
Berle and Means (1932) point out that potential conflicts of interest arise
between corporate managers and dispersed shareholders when managers do not have anownership interest in the firm. After Berle and Means' seminal paper, various aspects ofthis so-called agency problem have been analyzed. Among others, Jensen and Meckling(1976) formalize the relation between managerial equity ownership and the corporate
value. They divide stockholders into two groups, inside shareholders who manage thefirm and outside shareholders who do not. Both classes of shareholders are entitled tothe same dividends per share. The inside shareholders, however, are able to augment
their cash flows by additionally consuming non-marketable perquisites. In thisframework, there is an incentive for the manager to adopt investment and financing
policies that benefit him, but cost the outside stockholders. Thus, the firm value depends
on the fraction of shares owned by the management. The greater the management share,
the greater the firm value.
Fama and Jensen (1983) point out offsetting costs of significant management
ownership. When a manager only owns a smaller stake, he is disciplined toward firm
value maximization by the market forces such as the managerial labor market (Fama
1980), the product market (Hart 1983), and the corporate control market (Jensen andRuback 1983; Stulz 1988). In contrast, when a manager controls a substantial fractionof the firm's equity, he can entrench himself from these market disciplines. With
effective control, the manager may indulge in non-value-maximizing behaviors such as
high salary and empire building. This entrenchment possibility predicts that corporate
assets become less valuable when the management holds a significant portion of shares.
What Morck, Shleifer, and Vishny (1988) and McConnell and Servaes (1990)
try to accomplish is to document how these two offsetting forces are realized in realfirms using cross-section data. Morck et al. write on this point as follows:"Theoretical arguments alone cannot unambiguously predict therelationship between management ownership and market valuation of
the firm's assets. While the convergence-of-interest hypothesis suggests
a uniformly positive relationship, the entrenchment hypothesis suggeststhat market valuation can be adversely affected for some range of highownership stakes."
Morck et al. point out that it is not possible, a priori, to predict which force will
dominate at any level of managerial ownership. Thus, they argue that the relation
between ownership structure and corporate value is an empirical issue.
Demsetz (1983) argues that the ownership structure of a firm is an endogenous
outcome of competitive selection in which various cost advantages and disadvantages

are balanced to arrive at an equilibrium organization of the firm. He writes as follows:"One cannot simply assert that diffuse ownership fails to yield maximum
profit or maximum value of the firm. A decision by shareholders to alter
the ownership structure of their firm from concentrated to diffuse should
be a decision made in awareness of its consequences for loosening
control over professional management. The higher cost and reduced
profit that would be associated with this loosening in ownership control
should be offset by lower capital acquisition cost or other profitenhancing aspects of diffuse ownership if shareholders choose tobroaden ownership."Accordingly, he concludes that ownership concentration and profit rate should beunrelated.
As mentioned above, Demsetz and the others suggest quite different
implications about the relation between management ownership and firm's performance.
Demsetz argues that there should not be any significant relation between management
ownership and firm's performance with a few possible exceptions that we would
mention below. In contrast, the others argue that theory itself cannot tell much about the
specific relation between management ownership and firm's value. They say it is rather
an empirical issue.
How could Demsetz and the others suggest quite different implications? We
think the fundamental source of difference lies in the way of interpreting management
perquisite consumption. Morck et al. seem to think that management can indulge in
non-marketable perquisite consumption at the expense of outside shareholders. There
are two countervailing forces in this regard. On one hand, as the management
ownership increases, the management itself bears the greater portion of the cost of
perquisite consumption, which will enhance self-discipline on perquisite consumption.
On the other hand, as the management ownership increases, the management effectively
protects himself from market discipline on perquisite consumption, which will reduce
external discipline on perquisite consumption. There exists a trade-off between selfdiscipline and external discipline as the management ownership changes. As they point
out, their theory does not tell us anything about whether management's optimal
perquisite consumption increases or decreases as the management ownership changes. It
is to be found empirically.
In addition, the management ownership level is exogenous in their theory.
Determinants of management ownership are beyond their theory. Why does the
management of some firms possess large ownership share, whereas the management ofothers does not? If there exists an optimal level of the management ownership mostappropriate to maximize the perquisite consumption, why does the management not try
to adjust its ownership to the optimal level? Their theory does not address thesequestions.
According to Demsetz, there is no free lunch. If there exists a possibility formanagement to indulge in excessive perquisite consumption at the cost of outside
shareholders, rational investors would take into account this possibility and try to makemanagement bear the full cost of expected perquisite consumption at the time they
invest in the firm. The resulting outcome is desirable for neither the management nor
the outside investors. Both management and outside investors would be better off ifthey find some mechanisms to reduce perquisite consumption. To Demsetz, increasing
management ownership is a way of reducing this agency problem through the
management's self commitment not to indulge in excessive perquisite consumption, andtherefore it is not right to say that increase in management ownership causes higher
agency cost through effective entrenchment.
Rather, in Demsetz's theory, the cost of increasing management ownership arises
from a different source. To increase management ownership, the management should
invest a larger portion of its wealth in the firm he manages. This means that the
management should take higher firm-specific risks and forgo benefits of diversification.
To induce increased management ownership, the firm or the investors as a whole shouldcompensate the management for bearing these higher risks, or for sacrificing
diversification. This compensation will raise capital cost of the firm. Also, given thesize of the management wealth, maintaining a high level of management ownership
restricts the firm size and thus economies of scale in production. There exists a trade-off
between agency cost on one side, and capital cost and production cost on the other. In
the process of firm's value maximization considering these trade-offs, shareholders as awhole (including the management) determine the general ownership structure and the
management ownership. In Demsetz's firms, management ownership level is determined
endogenously together with other factors affecting the firm performance, leading to lackof any significant relation between the management ownership and the firm value.
In his recent book, Demsetz (1995, pp. 66-72) recognizes that there might be
one possible exception to this prediction on the relation between ownership structureand firm's performance. Demsetz suggests that if the management indulges in amenity
consumption and he has sufficient wealth to persist in amenity consumption, therecorded performance and market value of the firm can be depressed in equilibrium.
Here, amenity is defined as the way firm's assets are used and the nature of the productthe firm produces. Demsetz write as follows:"An individual who owns a newspaper might derive utility frominfluencing the political tastes of readers. Catering to this preference
may come at the expense of profit, for readers might not relish continued
exposure to the owner's political philosophy in the news andeditorializing given to them, and it certainly will alter the content of thenewspaper as compared to one designed simply to maximize profit."
In this case, the management would rather continue amenity consumption even though
he should fully pay for it in the form of low profit and low market valuation of his firm.
This is more likely to be sustained in those firms where the incumbent management
holds large enough shares to secure control over the firm from corporate control market.
If this kind of amenity consumption is a dominant motive for the management to holdlarge, sometimes majority, shares, we expect to see low performance in those firms withlarge management ownership.
We suggest another channel through which the management ownership affects
the firm value. Investors, ex ante, can ask full payment for the expected management
perquisite consumption. Management may indulge in more perquisite consumption ex
post than expected ex ante at the cost of outside shareholders. The occurrence of thisevent will lower firm's performance than implicitly contracted for. There exists a
possible remedy for this. Takeover is that. Takeover can eliminate excessive ex post
perquisite consumption. Accordingly, we expect to run into management indulging inexcessive ex post perquisite consumption more frequently in firms where themanagement owns a large enough share and thus the takeover threats do not work. Thisconjecture leads to the empirical implication that there will be negative relation between
management ownership and the firm performance.
As a measure of firm's performance, Morck et al. and McConnell et al. use
Tobin's Q, whereas Demsetz and Lehn use profit rate. Does it matter whether one uses
firm's market value or profit rate as a measure of firm's performance?
Firm's market value reflects future profitability of the firm as well as current
profit. On top of these, as market micro structure theory suggests, the market value
might be affected by the extent of information asymmetry, frequency or volume ofinsider trading, and liquidity whereas profit stream is quite immune to these elements.
As a result, the recorded rate of return may differ across investors and securities being
traded. For example, if there exists a significant difference in liquidity between two
equities, the less liquid equity should offer a higher recorded return enough to offset
reduction in liquidity to induce investors to buy the equity.
Regarding this, Demsetz (1986) suggests quite an intuitive interpretation for
insider trading and its effects on recorded rate of return. Demsetz asks whether insider
trading is a way of compensation to management for bearing a higher firm-specific risk,
and whether investors take into account the possibility of exposure to insider tradingwhen they trade equity of the firm. Demsetz and Lehn (1985) show that firms with highfirm-specific risks tend to have more concentrated ownership structure. Demsetz (1986)
reports that there exists a positive correlation between the degree of insider trading andthe firm-specific risk, and a negative correlation between the degree of insider trading
and the recorded market rates of return. Demsetz interprets this empirical result as anindirect evidence supporting that insider trading is a way of compensation to controllingshareholders for taking a high firm-specific risk, and that investors discount stocks
being actively traded by insiders.
If investors ask price discount for the equities insiders are intensively trading,and if insider trading is one way of compensation to management for bearing a higher
firm-specific risk, then increasing management ownership will depress market price ofequity of the firm in equilibrium. From this, we can expect a negative relation between
the management ownership and the firm's market value even when there is no
significant relation between the management ownership and the firm's performance interms of profit rate. We expect to see that the relation between the firm value and the
management ownership would be relatively more negative in the case of using market
value as the dependent variable than in the case of using profit rate as the dependent
variable.
3. Hypotheses
In this paper, we investigate the relation between the management ownershipand the firm value after controlling for unidentified inter-firm differences and thehistory of management ownership changes using panel data. Management is defined as
officers and directors as usual.
First, we consider the history of management ownership of a firm as animportant factor that can possibly affect the firm's market value. More specifically, we
test a hypothesis that firm's market value be negatively affected by the extent ofmanagement's insider trading. We also test another hypothesis that firms market value
be positively affected by an increase in management ownership, which is measured by
the difference of management shareholding between the current year and the previous
year.
Under asymmetric information between management and outsiders, a firm
experiencing intensive insider trading would incur higher implicit transaction cost to
uninformed outsiders. This perception would lead outsider investors to ask pricediscount when they buy such a firm's equity. Also, the direction and amount of change
in management shareholding between two consecutive years can be interpreted as theexistence of insider's private information about the future profitability of the firm. Whenthe management shareholding increases, it would have positive effect on the firm's
market value because uninformed outsiders would interpret it as the existence of highprofit opportunity in the future. With this perception, outsider investors would be
willing to pay premium when they buy such a firm's equity.
4. Data and results
4.1 Data
In this analysis, price-earnings ratio is regressed against the measures ofownership and other control variables. Tobin's Q has been used by many studies
including Morck et al. and McConnell et al.
Tobin's Q has some defects to be used as a measure of firm's value. First, theprocess of computing it inevitably entails some arbitrariness. For example, it is hard tofind objective criteria to compute replacement costs. Second, as Bagnani, Milonas,
Saunders, and Travlos (1994) point out, market price of risky debt may also be affectedby management ownership. If this is the case, we should use market price of debt when
we use Tobin's Q as a measure of firm's market value, which was not the case inprevious studies. Further, if we use market prices of debt to take into account this point,
Tobin's Q would not anymore be an appropriate measure of firm's value fromshareholders' perspectives, rather it is a measure of firm's market value from generalclaim holder's perspective.
Price-earnings ratio does not face these problems. It does not require any
arbitrary computing process. In price-earnings ratio, earnings can be considered as ameasure of opportunity cost of shareholders' capital, and price of equity is the rightmeasure of firm's market value from shareholders' perspectives. So, in this paper, we
use price-earnings ratio as a measure of firm value.
This paper uses data on 11 firms in the chemical industry. For each sample firm,
we have annual data from 1981 through 1990, resulting in 110 (firm, year)
combinations. As the data source, we use the Value Line Investment Survey which is
being widely used in related works.
4.2 Estimation results
We estimate three panel data models: pooled least squares, fixed effects, andrandom effects models. The pooled least squares treats time-series data of a firm just as
different firms at a point in time. This method does not utilize information on who's
who regarding firm identity. The reason why we still report the pooled least squares
results is twofold. One is that, even though it has the afore-mentioned defect, the pooled
least squares effectively maximizes the sample size. The other, more important, reason
is that the pooled least squares is similar to the cross sectional analyses in that it does
not control for unidentified inter-firm differences even though it controls for the historyof management ownership. Table 1 shows the results of the pooled least squares, which
serve as a benchmark for interpreting the panel estimation results in table 2.
In table 1, when we initially regress price-earnings ratio on management
ownership share, we obtain a negative linear relation between management
shareholding and price-earnings ratio. When we include the variance of or the change inmanagement shareholding as a proxy for insider trading, the proxy variable turns out
significant, whereas the management shareholding itself loses statistical significance.
Column 5 shows that the coefficient of the variance of management shareholding is
negative and statistically significant at 1% significance level, whereas the coefficient of
the level of management shareholding is insignificant even at 10% level. Column 6shows that the coefficient of the change in management ownership is positive andstatistically significant at 1% level, whereas the level of management ownership is
insignificant at 10% level.

Table 1. Results from the pooled least squares
Pooled least squares regression of price-earnings ratio on equity ownership, variance of management shareholding,change in management shareholding, dividend per share, debt ratio, expected growth rate of earnings per share, andvariance of earnings per share.
(1)

(2)

(3)

(4)

(5)

(6)

Intercept

15.42**(44.92)15.44**(37.03)15.14**(36.20)15.67**(32.84)14.78**(17.84)15.80**(18.31)

Insider-0.06**(-5.27)-0.68(-1.34)0.01(0.27)-0.03(-1.20)insider^2
insider+block(insider+block)^2
var(insider)

0.00(0.15)-0.04*(-2.22)-0.15**(-2.79)-0.003*(2.41)-0.04**(-3.45)0.13**(2.92)

change(insider)
Dividend

3.03**(3.43)

1.00(1.48)

Debt-3.86**(-2.67)-5.43**(-3.46)

r_E/S

3.19**(4.05)

2.70**(3.22)

var(E/S)-2.15**(-3.08)-0.95(-1.55)

1. Within parentheses are t-values.
2. Variables are defined as follows.
(a) insider: fraction of management share (%),(b) insider+block: sum of management share and outside block holder share (%),(c) var(insider): variance of “insider” over time,(d) change(insider): change in “insider” between the previous year and the current year,(e) dividend: dividend per share,(f) debt: debt ratio,(g) r_E/S: expected growth rate of earnings per share,(h) var(E/S): variance of earnings per share over time.
3. **, *, and # denote statistical significance at 1%, 5%, 10% level, respectively.

Table 2. Results from the fixed effects and the random effects models
Regression of price-earnings ratio on equity ownership, variance of management shareholding, change inmanagement shareholding, dividend per share, debt ratio, expected growth rate of earnings per share, and variance of
earnings per share.
fixed effect model

random effect model

(1)

(2)

(3)

(4)

intercept--

14.86**(13.01)

16.69**(16.62)

insider-0.09(-1.61)-0.13*(-2.33)0.00(0.07)-0.03(-1.09)var(insider)-0.17(-2.06E-15)-0.06**(-3.01)0.18*(2.21)

0.13*(2.17)

change(insider)dividend

1.40(1.69)

0.18(0.12)

3.23**(2.80)

0.78(0.87)

debt-0.26(-0.15)-0.45(-0.27)-4.07*(-2.07)-8.47 **(-4.74)

r_E/S

3.55 **(4.85)

3.56**(4.84)

3.73**(4.43)

3.31**(3.51)

var(E/S)

15.37(9.77E-16)

13.04(8.23E-16)-2.08#(-1.81)-1.1(-1.25)

1. Within parentheses are t-values.
2. Variables are defined as follows.
(a) insider: fraction of management share (%),(b) insider+block: sum of management share and outside block holder share (%),(c) var(insider): variance of “insider” over time,(d) change(insider): change in “insider” between the previous year and the current year,(e) dividend: dividend per share,(f) debt: debt ratio,(g) r_E/S: expected growth rate of earnings per share,(h) var(E/S): variance of earnings per share over time.
3. **, *, and # denote statistical significance at 1%, 5%, 10% level, respectively.

Among other results are that high debt ratio and volatility in earnings per share
have negative impact on firm's market value, whereas high dividend payment and highexpected growth of earnings have positive effects.
In table 2, we report the estimation results from fixed effects and random effects
models. There are trade-offs between the two panel data models. The fixed effects
model better controls for unobserved inter-firm differences and better addresses thepotential endogeneity problem of the management ownership variable, whereas therandom effect model is more parsimonious in terms of the parameters being estimated.
Alternatively speaking, the fixed effects model loses too many degrees of freedom,
whereas the random effects model does not address the potential endogeneity of the
management ownership variable and only partially controls for the unobserved interfirm differences.
The results in table 2 again suggest that management ownership history mattersand that once the variance of or change in management ownership is controlled the
management shareholding itself does not have any significant effect on the firm value.
Most results agree with the corresponding results in Table 1. Statistical significancedrops though in Table 2, particularly so in the case of fixed effect models.
Even with limited data, it is suggestive that the history of management
shareholding be crucial in determining the firm value. First, market participants ask a
discount when they trade equities of a firm of which the management is actively
involved in trading. Second, market participants are willing to pay premium to buy
equities of a firm of which the management recently increases its shareholding.
5. Concluding remarks
This paper revisits the issue of analyzing the relation between the insider
ownership share and the firm value. Under information asymmetry between the inside
management and the outside investors, history of the management ownership affects afirm’s value in the following two ways. First, an active insider trading poses thepossibility of outsider exploitation by the inside management, depressing the firm value.
Second, insider’s buying of shares signals positive news on the firm’s value in a
credible way, increasing the firm value.
Previous cross-sectional studies do not take into account of the management
ownership history, resulting in specification errors and biased estimates. This paper, byusing panel data of firms in a single industry, shows that the management ownershiphistory indeed matters in determining the firm value as predicted by the information
asymmetry arguments. This paper also shows that once the management ownershiphistory is controlled, the level itself of the management ownership is no longer
statistically significant.
At the current stage, we think that the sample size is rather small. Therefore, wedo not want to over-sell the empirical results obtained in this paper. Rather, we would
like to point out that our hypotheses deserve further empirical investigation. A more in
depth study will be reported in a near future.
With a bigger data set in the future, we are planning to address the following
issues. First, we test endogeneity of the management ownership variable using Hausman
and Taylor's (1981) IV/GLS techniques. Second, we allow for a non-linear relationshipbetween the management ownership and the firm value by specifying a flexible linear
spline function of the management ownership variable.
Third, we measure the firm value using both market value and profit rate, andsee whether the relation between the firm value and the management ownership would
be relatively more negative in the case of using the market value as the dependent
variable than in the case of using the profit rate as the dependent variable. Morespecifically, we test the hypothesis that between management ownership and profit rate
there be no significant relation or slightly negative relation in the range of highmanagement ownership level, and the hypothesis that there be negative relation between
management ownership and firm's market value.

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