Managerial Ownership and Firm Value: Evidence from Japan1
Toshiaki Yamanaka2
September 2020
Abstract
By using nearly 60,000 firm-years of Japanese firms from 2000 to 2017, we find that, in general, therelation between a firm’s managerial ownership and Tobin’s q is positive. The positive relation is robust to bothmeasurement error and the influence of outliers, and it is due to the subset of young firms with high managerial
ownership that have higher Tobin’s q. The general reduction in managerial ownership after an IPO is theprimary factor contributing to the change in managerial ownership. Our results suggest that the fraction of
newly listed firms is a decisive factor in the relation between managerial ownership and firm value. When we
restrict our sample to larger firms, a hump-shaped relation is observed, at which point our analysis is consistent
with the prior literature on American firms. For firm-years in the low liquidity bracket, the relation is inversely
hump-shaped and mostly negative. The firm-years in the low liquidity bracket have a different relation between
managerial ownership and Tobin’s q compared to those in the high liquidity bracket, at which point Americanand Japanese firms are similar.
JEL classification: G30, G32
Keywords: Managerial ownership, firm value, IPO, liquidity, dual-class firms, JapanThe author thanks Anthony J. Casey, Hiroyuki Egami, Daisuke Hirata, Yoshio Nozawa (discussant at the
Nippon [Japanese] Finance Association 2020 Annual Meeting), Yoshiaki Ogura (discussant at the Japanese
Economic Association 2020 Spring Meeting), Peng Xu and the participants of these meetings and theWorkshop for Economic Analysis of Law (in Japan) for their helpful comments. For the American Law andEconomics Association 2020 Annual Meeting, accepted papers were circulated for comments, and the author
also received helpful comments from Colleen Honigsberg, J. Mark Ramseyer and Holger Spamann. This
research is supported by the Graduate Schools for Law and Politics at the University of Tokyo and by a grantfrom the Japan Society for the Promotion of Science (grant number: 19K13555).
2
Formerly of the University of Tokyo. E-mail address: yamanaka [at] caa.columbia.edu
11

1. Introduction
In the United States, in the corporate finance literature, it is well known that Tobin’s q
first increases, then declines, and finally rises as ownership by corporate directors increases(Morck, Shleifer and Vishny 1988, p. 293, hereafter MSV). Based on a larger sample,
McConnell and Servaes (1990, p. 595) also find a curvilinear relation between the fraction ofmanagerial ownership and Tobin’s q. Holderness, Kroszner and Sheehan (1999, p. 465) showthat the shape of the relation between firm performance and the level of managerial ownership in
1935 is similar to what MSV find with 1980 data. Kim and Lu (2011, p. 289) demonstrate thatthe relation between CEO ownership and Tobin’s q is hump-shaped when external governanceis weak, but the relation is insignificant when external governance is strong.
The relation between managerial ownership and Tobin’s q is often analyzed bycross-sectional regressions without controlling for firm fixed effects. In the beginning,
Himmelberg, Hubbard and Palia (1999, p. 353, hereafter HHP) document that after controllingfor both observed firm characteristics and firm fixed effects, they cannot conclude(econometrically) that changes in managerial ownership affect Tobin’s q. In commenting on
HHP, Zhou (2001, pp. 559, 566) points out that because managerial ownership typically changes
slowly from year to year within a firm, fixed effects estimators may not detect an effect ofownership on performance, and if ownership is important to managerial incentives, its effect on
performance would necessarily show up in cross-sectional tests. More recently, by using morethan 50,000 firm-years from 1988 to 2015, Fabisik, Fahlenbrach, Stulz and Taillard (2018,
hereafter FFST) show that the empirical relation between a firm’s managerial ownership andTobin’s q is systematically negative. Specifically, by adopting adjusted Fama-MacBeth(hereafter FM) regressions (Fama and MacBeth 1973), FFST (pp. 27-28) conclude that therelation between managerial ownership and Tobin’s q documented in the literature does not holdfor larger samples that include a greater number of smaller firms, even though for the subset ofthe largest firms, their estimates are similar to those found in MSV and McConnell and Servaes(1990).

2

There has also been discussion regarding whether the relation is causal. By examininga sample of firms adopting target ownership plans, Core and Larcker (2002, p. 317) find that therequired increases in the level of managerial ownership result in improvements in firm
performance. Coles, Lemmon and Meschke (2012, p. 149) conclude that proxy variables, fixed
effects and instrumental variables do not generally provide reliable solutions to simultaneity bias.
In this setting, Li, Sun and Yannelis (2018, p. 1) identify the causal effects by exploiting the 2003
tax cut, which increased net-of-tax managerial ownership, and uncover a hump-shaped
improvement in Tobin’s q as a response to the level of managerial ownership.
In this paper, we focus on Japanese firms, in an effort to further clarify the relation
between managerial ownership and firm value, and to examine the relevance and external
validity of theories and empirical evidence from American firms. In Japan, the number of
equities (both common equities and dual-class stocks) owned by directors and officers(shikkōyaku) is disclosed on an individual basis as an item in Annual Securities Reports(yūkashōken hōkokusho, Japan’s version of the Form 10-K), and the information about
managerial common equity ownership is commercially available as data (Nikkei Directors andOfficers data (yakuin data), see Appendix A) from the fiscal year ended in March 2003 to thepresent for all firms listed on a stock exchange in Japan.3 To the best of our knowledge, ourpaper is the first to analyze Japanese firms in large datasets and to clarify the relevance andexternal validity of theories and empirical evidence from American firms in the context of therelation between managerial ownership and firm value.4
The paper proceeds as follows. In Section 2, we introduce and present the institutionalsetting and data, and summary statistics. We consider determinants of managerial ownership in
Section 3. Then, in Section 4, we report that in Japanese firms, the empirical relation between
FFST (p. 5) collect data from Compact Disclosure for the period from 1988 to 2003 anddownload and parse all proxy materials and information statements from the EDGAR website
for the period from 2004 to 2016.
4
Kaplan (1994, p. 535 Table 4, pp. 539-541) analyzes the director and officer ownership in
relation to cash compensation. Weakly related literature includes Morck, Nakamura andShivdasani (2000) and Franks, Mayer and Miyajima (2014).
3

3

managerial ownership and Tobin’s q is statistically significantly positive in general. In Section 5,
we clarify the external validities of theories and empirical evidence from American firms. We
conclude in Section 6.

2. Data and summary statistics
2-1. Data
2-1-1. Managerial ownership
We first describe our data in relation to the institutional setting in Japan. In Japan, thenumber of equities owned by directors and officers is disclosed on an individual basis under the“Cabinet Office Ordinance on the Disclosure of Corporate Affairs, etc.” The amount of stock
options granted to directors and officers, however, is not disclosed.5 Traditionally, ownershipdid not include shares held by relatives and trusts of the directors (Kaplan 1994, p. 539).
However, by the amendment of the Ordinance on March 31, 2005 (effective from April 1, 2005
to the present), ownership is changed to a substantial basis, which includes the shares for which
the director or officer is substantially able to exercise their voting rights and to receive dividends
substantially.6
For determining the amount of common equity outstanding as a denominator for
managerial ownership fraction (m), we use common equity outstanding as of the date on whichan Annual Securities Report is submitted.7
Therefore, Kato, Lemmon, Luo and Schallheim (2005, p. 439) analyze stock option plan
adoptions by using the sample provided by Daiwa Securities. When analyzing the relation
between managerial ownership and firm value, it is common not to include options that havebeen granted but whose earliest exercise date is more than 60 days from the date of the proxy(Holderness, Kroszner and Sheehan 1999, p. 449; FFST pp. 4-5).
6
The findings reported in our paper hold even when we start our sample period from April
2005, and they are robust to the point in the text (for other robustness tests, see Section 4-3).
7
Different from American firms, Japanese firms generally do not specify the record date ofmanagerial ownership. Japanese law (“Cabinet Office Ordinance on the Disclosure of Corporate
Affairs, etc.”) generally defines the information on managers as of the date of submitting an
Annual Securities Report, but the record date of managerial ownership appears not to be
explicitly clarified. However, several firms voluntarily report that the date is the same as that ofsubmission. For that date, we use Nikkei NEEDS Financial Quest data (A01071 [reporting date
54

2-1-2. Sample periods and firms
We start our sample period from fiscal year 2000.8 To do so, we hand-collect Annual
Securities Reports from PRONEXUS’ eol database for fiscal years 2000 to 2002 (specifically,for fiscal years that ended from April 2000 to February 2003, which are not covered in the
Nikkei Directors and Officers data) and obtain data on managerial ownership for the period.9
Our sample period ends in fiscal year 2017 (March 2018 at the latest firm).
We set our potential sample firms as all those listed on a stock exchange in Japan
during the sample period. Specifically, we obtain potential firm-years by combining Nikkei
NEEDS Financial Quest (hereafter FQ) data, which covers all Annual Securities Reports (except
for those submitted by foreign firms), and the stock price data provided by Financial Data
Solutions (hereafter FDS) to confirm that a firm is listed on the date on which its fiscal year ends.
This leaves us with 66,786 potential firm-years.
Next, we exclude 2,080 firm-years belonging to financial firms (Tokyo Stock
Exchange (hereafter TSE) industry codes: 7050, 7100, 7150 and 7200), utilities (4050) or
investment corporations (the code is missing).10 We also eliminate 195 firm-years in which a/ scheduled reporting date] and A01037 [annual shareholders’ meeting date] when it is missing).
Listed firms typically submit an Annual Securities Report immediately after an annual general
meeting, which is generally about three months after the fiscal year-end date. Our approach isconsistent with the past literature on American firms (Fahlenbrach and Stulz 2009, p. 346; FFST
p. 6) in that the fiscal year-end date is prior to the record date or the submission date, but the timelag between the two is larger for Japanese firms than for American firms.
8
For the entire sample firms, the fiscal year ends on March 31 for approximately 70%,
December 31 for approximately 8% and February 28 (or 29) for approximately 6%.
Considering these facts, the sample firms are categorized into each year group according to themonth in which their fiscal year ends. For example, the firms whose fiscal years end in April
2000 to March 2001 are categorized in the same year group 2000.
9
We first apply an OCR (optical character recognition) software to the documents and thencollect information on managerial ownership by using a VBA (Visual Basic for Applications)algorithm we develop. The algorithm appears more effective than that from Python
programming in the context where Japanese letters are analyzed. We also verify the information
with the original documents when errors are generated by the OCR software.
10
We obtain historical TSE industry codes of a firm from FDS Japanese Listed Stocks Monthly
Return Data (code: TSE33). The codes are assigned by Securities Identification Code5

firm changes the month in which its fiscal year ends and it does not reach 12 months. We
remove firm-years when at least one of the following variables is missing: managerial
ownership (m), Tobin’s q (see Appendix B), sales, operating income, tangible assets and capital
expenditure (see Appendix A). Finally, we weed out dual-class firms (see Appendix C).11 As aresult, we obtain a sample of 59,064 firm-years for 4,905 unique Japanese listed firms from2000 to 2017.

2-1-3. Firm value, past liquidity and other variables
We adopt Tobin’s q as a proxy for firm value, which is conventional (for the estimation,
see Appendix B). We use both Amihud’s (2002, p. 34) and Fong, Holden and Trzcinka’s (2017,p. 1362, hereafter FHT) measures as a proxy for illiquidity (see Appendix A). Most of the othervariables adopted in our paper follow MSV, McConnell and Servaes (1990), HHP, Fahlenbrachand Stulz (2009, hereafter FS) and FFST (for the other variables, see Appendix A).12

Committee, and available for all listed firms (except for investment corporations, etc.) on a stock
exchange in Japan as well as those listed on TSE.
11
To issue dual-class stocks, Japanese firms are required to note this in their charters underJapan’s Companies Act. We obtain listed firms’ charters from PRONEXUS’ eol database for the
sample period, apply an OCR software, and then collect information about whether a firm is adual-class firm by applying our algorithm to search for the word (shuruikabu), which expresses
dual-class stocks. The years succeeding the change to a dual-class firm are excluded unless thefirm is specified as a non-dual-class firm by confirming that the word is not included in its
charter. We identify 899 firm-years using the algorithm. Dual-class stock separates cash-flow
rights from voting rights (Gompers, Ishii and Metrick 2010), and dual-class firms are commonly
excluded in the literature in the context (Fahlenbrach and Stulz 2009, p. 346). During the sample
period, less than 3% of the observations in a year are removed as dual-class firms (Appendix
C(a)), which have statistically significant characteristics (Appendix C(b)). For example,
dual-class firms have significantly higher book value of assets and higher ratio of long-term debt
to assets than single-class firms (Appendix C(b)).
12
As is common in the literature, we do not control governance mechanisms by using corporate
governance indices, such as G Index (Gompers, Ishii and Metrick 2003) or E Index (Bebchuk,
Cohen and Ferrell 2009). Li, Sun and Yannelis (2018, p. 45 Table 8) analyze interaction withalternative governance channels by applying these indices.
6

2-2. Summary statistics
We first report the summary statistics for the variables adopted in the analysis in Table
1(A). In our sample, the mean and median managerial ownership fractions (m) are 8.8% and2.0%, respectively.13 This suggests that the distribution is also skewed in Japan as well as in the
U.S. (MSV p. 297 Table 1; Li, Sun and Yannelis 2018, p. 7). Those fractions are considerably
lower than those in the U.S. (FFST p. 47 Table 1).
Second, we also report the mean values of Tobin’s q, grouped by level of managerial
ownership in Table 1(B). In contrast to American firms (MSV pp. 297-298 Table 1), meanvalues of Tobin’s q in all firms are slightly higher when managerial ownership (m) is 25% ormore (Table 1(B)(a)). This is due to the subset of sample firms called young firms (Table
1(B)(c)), rather than named mature firms (Table 1(B)(d)).14
Finally, summary statistics by fiscal year are provided in Table 1(C). Different from
American firms (FFST pp. 9, 47 Table 1), it is difficult to discern a clear pattern in the mean andmedian managerial ownership (m) in all firms over the sample period (Table 1(C)(a)). This isalso relevant to 500 largest firms (Table 1(C)(b)).15 The 500 largest firms appear to be listed fora longer period than all firms and are less illiquid in terms of both Amihud and FHT measures
We define a CEO as a director or officer who has the largest ownership fraction for a firm ineach year among those who have the title to represent the firm (when two or more are observed,
whose term of office as a director or officer is the longest), and find that the mean and medianmanagerial ownership fraction by the single CEO are 6.1% and 0.6%, respectively, suggestingthat a considerable amount of managerial ownership is due to the single CEO. Next, we confirm
that the results reported in our paper are robust to the effects by corporate governance changes
during the sample period. Specifically, numerous directors who do not have the title to represent
the firm are changed to employees (whose equity ownership is generally not disclosed and thus
not included in our m after the change) and a number of statutory auditors (whose ownership is
not included in our m) become outside directors (whose equity holdings are covered) during thesample period. However, our findings in the paper generally do not meaningfully change evenwhen we adopt the single CEO’s ownership fraction as m, and they are robust to the effects bysuch changes in corporate governance.
14
We divide the sample into two subsets according to the years for which a firm is listed, whichis expressed by the variable years listed (see Appendix A). A firm-year observation iscategorized as either young firms when years listed is less than 10 (years), or mature firms when
it is 10 or more.
15
500 largest firms are selected from the sample in each year in terms of sales.
13

7

(Tables 1(C)(a) and 1(C)(b)). Both illiquidity measures significantly decline during the sample
period but spiked during the financial crisis 2007-2009, at which point the results are similar
between American and Japanese firms (FFST pp. 9-10, 47 Table 1; our Tables 1(C)(a), 1(C)(b),1(C)(c) and 1(C)(d)). Although mature firms by definition are listed for a longer period, they are
not necessarily less illiquid than young firms in both measures depending on a fiscal year
(Tables 1(C)(d) and 1(C)(c), respectively).

3. Determinants of managerial ownership3-1. Determinants of ownership level3-1-1. Empirical methodology
The determinants of managerial ownership are reported in this section. To do so, we
first follow HHP’s (pp. 362-366) approach. Specifically, as in HHP (p. 366), we adopt thefollowing expression for managerial ownership as a baseline model:

𝑚𝑖𝑡 = 𝑓(𝐿𝑁(𝑆)𝑖𝑡 , (𝐾/𝑆)𝑖𝑡 , 𝑅𝐷𝐾𝑖𝑡 , 𝑅𝐷𝑈𝑀𝑖𝑡 , (𝐴/𝐾)𝑖𝑡 , 𝐴𝐷𝑈𝑀𝑖𝑡 , (𝐼/𝐾)𝑖𝑡 , (𝑌/𝑆)𝑖𝑡 , 𝑆𝐼𝐺𝑀𝐴𝑖𝑡, 𝑆𝐼𝐷𝐺𝑈𝑀𝑖𝑡 ) + u𝑖 + 𝜂𝑖𝑡(1)

where i and t represent the firm and time, respectively, 𝑢𝑖 is the firm-specific effect, and 𝜂𝑖𝑡 isthe error term. The corresponding variables are described in Appendix A.

3-1-2. Determinants of ownership level
Our estimates of the determinants of managerial ownership (m) are reported in Table 2.
Following Demsetz and Lehn (1985, p. 1163), m is transformed into 𝐿𝑁(𝑚⁄(1 − 𝑚)) as thedependent variable. As in HHP (p. 368 Table 4(A)), in specifications considering firm fixed
effects (columns (3) to (5) in our Table 2), we control for the unobserved firm heterogeneity
expressed by 𝑢𝑖 in Eq. (1).
In the specification using pooled data for all firms, increases in firm size (LN(S)) are8

associated with an increase in managerial ownership (m) at the 5% significance level (column(1) in Table 2), which is also relevant to those whose industry fixed effects are controlled(column (2)). These results are different from the findings reported for American firms (HHP pp.
366, 368 Table 4), however, when we restrict our sample to the 500 largest firms, increases infirm size (LN(S)) are associated with a reduction in managerial ownership (m) at the 10%
significance level (column (4) in our Table 2).
In the specification for all firms controlling for firm fixed effects, although thecoefficients of SIGMA and ADUM are statistically significant, none of the other explanatory
variables are statistically significant at the 10% level (column (3) in the same table). The
inclusion of firm fixed effects changes the significance of most explanatory variables (columns(1) and (3)), and thus the unobserved firm characteristics are correlated with the observed
characteristics, at which point the results are similar to those reported for American firms (HHP
p. 368 Table 4, p. 370).

3-1-3. Effects on managerial ownership
The effects of past stock liquidity on managerial ownership are reported in Table 3. We
estimate both adjusted FM and OLS regressions, and the specifications in the table arecomparable to those of FFST (p. 53 Table 6). For adjusted FM regressions, the reported
parameter estimates are time series averages of yearly regression coefficient estimates. Since theexistence of autocorrelation in the parameter estimates from year-by-year regressions would bias
the statistical significance, following Chakravarty, Gulen and Mayhew (2004, pp. 1249-1250
note 9), we adjust the standard errors for first-order autocorrelation by multiplying the standard
errors of the average parameters by √(1 + 𝜌)⁄(1 − 𝜌) , where 𝜌 is the first-order
autocorrelation in yearly parameter estimates (hereafter the same applies to all adjusted FM
regressions in our paper).16
Petersen (2009, p. 465) notes that many authors have suggested adjusting the standard errors
for the estimated ﬁrst-order autocorrelation of the estimated slope coefﬁcients, and the proposed16

9Both high liquidity years (FHT) and low liquidity years (FHT) are statisticallysignificant at the 1% level, no matter whether year fixed effects are controlled (columns (5) to(8) in our Table 3), and the positive or negative signs of the coefficients are opposite to thosereported for American firms (FFST p. 53, columns (5) to (8) in Table 6). Our results suggest thatJapanese firms with a history of high or low liquidity have significantly higher or lower
managerial ownership (m), respectively, which is in marked contrast to the findings on American
firms.

3-2. Ownership structure following an IPO
Apart from the analysis based on HHP’s (pp. 362-366) specification, distribution ofchanges in m in the years after an IPO is presented graphically in Figure 1. The medianmanagerial ownership (m) constantly declines following an IPO, and the percentage of widely
held firms continuously increases for at least 15 years after an IPO (Figure 1). The result is
consistent with that of Helwege, Pirinsky and Stulz (2007, p. 1007 Figure 3), except thatJapanese firms appear widely held in a shorter period of time than American firms, regardless ofwhether we define “widely held” as m less than 10% or 20% (Helwege, Pirinsky and Stulz 2007,
p. 1007 Figure 3; our Figure 1). Such changes in m over time after an IPO appear to be
associated with the difference in the distribution of m between young and mature firms (Tables
1(B)(c) and 1(B)(d)).

3-3. Large changes in managerial ownership
3-3-1. Empirical methodology
Considering the findings reported in this section, we further clarify determinants ofadjustment is to estimate the correlation between the yearly coefﬁcient estimates (i.e., Corr[𝛽𝑡 ,𝛽𝑡−1 ] = 𝜌), and then multiply the estimated variance by (1 + 𝜌)⁄(1 − 𝜌) to account for theserial correlation of the 𝛽s. Our adjustment is the same. Our adjustment is also consistent withthat of FFST. Specifically, FFST (p. 11) estimate a first-order autoregressive model for eachcoefficient and then use the estimated autoregression coefficients to adjust the FM standard
errors.
10

managerial ownership by focusing on a large change (drop or increase) in m. As in FS (p. 346),
we define a large drop or increase as a change in m larger than 2.5% in absolute value.
Approximately 9% of firm-years experiences such large changes in m (Table 4(A)), while on
average, about a third of American firms do so in a year (FS p. 346).
As in FS (p. 346), to investigate the extent to which changes in m in excess of 2.5% in
absolute value explain the variation in changes in m, we also estimate (but do not report) the
following regression for each year of the sample period:

𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑜𝑤𝑛𝑒𝑟𝑠ℎ𝑖𝑝𝑖𝑡 = 𝑐 + 𝛽 × 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑜𝑤𝑛𝑒𝑟𝑠ℎ𝑖𝑝𝑖𝑡 |𝐶ℎ𝑎𝑛𝑔𝑒< −2.5% + 𝛾 × 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑜𝑤𝑛𝑒𝑟𝑠ℎ𝑖𝑝𝑖𝑡 |𝐶ℎ𝑎𝑛𝑔𝑒 > 2.5% + 𝜂𝑖𝑡(2)

The R-squared of the regression exceeds 98.3% each year, which is similar to the results for
American firms (98%, FS p. 347). Therefore, as for American firms, the changes in m aremostly explained by large changes.
We further follow Helwege, Pirinsky and Stulz’s (2007, p. 1009 Eq. (1))
decomposition and FS’ (p. 352 Table 4) approach. Specifically, we also adopt the following
equation for decomposing changes in m:

𝑆𝑡+1
𝑆𝑡
Δ𝑆
Δ𝑁
)−( )=
Δ𝑚𝑡 = (
− 𝑚𝑡+1
𝑁𝑡+1
𝑁𝑡
𝑁𝑡
𝑁𝑡

(3)

where Δ𝑚𝑡 is defined as the change in m from 𝑡 to 𝑡 + 1, 𝑆𝑡 is the number of shares heldby managers at date 𝑡 and 𝑁𝑡 is the firm’s number of shares outstanding at date 𝑡. As inΔ𝑆Helwege, Pirinsky and Stulz (2007, pp. 1009-1010), the term 𝑁 in Eq. (3) represents the𝑡change in m explained by a change in the number of shares held by managers (the numerator
Δ𝑁change), and the term −𝑚𝑡+1 𝑁 is the change in m caused by a change in the number of𝑡shares outstanding (the denominator change).

11

3-3-2. Results
Our results are reported in Tables 4(A) and 4(B). Consistent with the findings forownership structure following an IPO (Section 3-2), young firms are more likely to experience alarge drop in managerial ownership (m) than mature firms (Table 4(A)). Young firms are also
more likely to have a large increase in m than mature firms (the same table).
We further report marginal effects of probit regressions of both a) large decreases andincreases in m and b) the decomposition of the large decreases and increases on changes in
explanatory variables in Table 4(B). Columns (1) and (4) in the table correspond to columns (1)and (2) in FS (p. 351 Table 3), and columns (2) to (3) and (5) to (6) are closely equivalent tocolumns (1) to (4) in FS (p. 352 Table 4).
The results show that a firm’s concurrent industry-adjusted stock returns are strongly
significant predictors of large decreases in m (column (1) in Table 4(B)), which is consistent withthe findings on American firms (FS pp. 350, 351 column (1) in Table 3). This is due to the subsetof young firms rather than mature firms (columns (7) and (9) in our Table 4(B)). In contrast to
American firms (FS p. 351 column (1) in Table 3), a Japanese firm’s concurrent market returns
are also strongly significant predictors of large decreases in m (columns (1) and (7) in our Table
4(B)).
The overall results appear broadly similar between young and mature firms (columns(7) to (10) in Table 4(B)), however, the major differences include the strong significance ofconcurrent industry-adjusted and market returns and lagged industry-adjusted returns in
predicting a large drop in m for young firms (columns (7) and (9)). In an unreported table, wefind that concurrent and lagged industry-adjusted returns are strongly significant predictors of alarge drop in m for young firms caused by either a numerator decrease or a denominator increase,suggesting that managers at a young firm (meaning during the period following an IPO) tend to
reduce their equities and also increase its shares outstanding when those returns are high. By
contrast, those returns are not significant predictors of a large drop in m for mature firms12(column (9)).
Consistent with the findings on American firms (FS pp. 350-351, p. 351 Table 3), large
decreases and increases in m are more likely if the level of m is high, and the probability of alarge decrease and increase in m is negatively associated with the change in m in the previous
year (columns (1) and (4) in our Table 4(B)).
Different from what is reported for American firms (FS p. 351 Table 3), Japanese firmsthat become financially constrained are more likely to experience a large decrease or increase inm (columns (1) and (4) in our Table 4(B)), whereas financial constraints are not significant
predictors of a large decrease in m for American firms (FS p. 351 Table 3).17 For Japanese firms,
the fact that a firm become financially constrained is a strongly significant predictor of both a) a
large drop in m caused by either a numerator decrease or a denominator increase and b) a large
increase in m due to either a numerator increase or a denominator decrease (columns (2), (3), (5)and (6) in our Table 4(B)).

4. Managerial ownership and Tobin’s q: Evidence from 2000 to 20174-1. Empirical methodology
The determinants of Tobin’s q are analyzed in this section. To do so, we again
fundamentally follow HHP’s (pp. 371-381) approach. Specifically, as shown in HHP (p. 359),
we adopt the following expression for firm value as a baseline model:

𝑞𝑖𝑡 = 𝛿𝑦𝑖𝑡 + 𝛽𝑥𝑖𝑡 + 𝛾𝑢𝑖 + 𝑤𝑖𝑡(4)

The presence and importance of financial constraints have been studied for American firms(Fazzari, Hubbard and Petersen 1988), while an index expressing financial (un)constraints is notestablished for Japanese firms, and we adopt a no-dividend dummy in the analysis (seeAppendix A). This appears related to the fact that it is not feasible to analyze managers’
discussion of liquidity that describes the firm’s future needs for funds and the source it plans to
use to meet those needs, as in Kaplan and Zingales (1997, p. 170), because such information isusually not disclosed in Japanese Annual Securities Reports. In this respect, Whited and Wu(2006, p. 541 Table 1) report their Euler-equation estimation results for American firms.
Hadlock and Pierce (2010, p. 1929) is a more recent development for American firms.
1713

where 𝑞𝑖𝑡 is the value of firm i at time t and 𝑦𝑖𝑡 is an optimal “effort level” chosen bymanagers, which depends on managerial ownership 𝑚𝑖𝑡 . 𝑥𝑖𝑡 and 𝑢𝑖 are observed andunobserved characteristics of the firm, respectively. We also adopt variants of the Eq. (4).

4-2. Results
4-2-1. Introduction
Our estimates of the determinants of Tobin’s q are reported in Table 5. The dependent
variable is Tobin’s q. The estimates of adjusted FM and OLS regressions are reported in Tables
5(A) and 5(B), respectively, corresponding to FFST (p. 48 Table 2 Panel A and p. 49 Table 2
Panel B, respectively). Quadratic specifications are adopted in Table 5(C)(a), corresponding to
HHP (pp. 374-375 Table 5(A)) and spline specifications are used in Table 5(C)(b),corresponding to HHP (pp. 376-377 Table 5(B)).
In all specifications in Table 5, explanatory variables include HHP control variables, inaddition to the 𝑚𝑖𝑡 in Eq. (4), as expressed by m (linear specifications) in columns (1), (4), (7)and (10) in Tables 5(A) and 5(B), by m and m^2 (meaning m2) (quadratic specifications) incolumns (3), (6), (9) and (12) in Tables 5(A) and 5(B) and in Table 5(C)(a) or by m1, m2 and m3(spline specifications) in columns (2), (5), (8) and (11) in Tables 5(A) and 5(B) and in Table
5(C)(b).18
In Table 5(A) adopting adjusted FM regressions, year fixed effects are not controlled,
but industry fixed effects are considered. In Table 5(B) based on OLS regressions, both year and
The piecewise-linear terms (m1, m2 and m3) are adopted by MSV (p. 298), and McConnell
and Servaes (1990, p. 601) propose the quadratic specifications (m and m^2). The
piecewise-linear terms allow for slopes to change at 5% and 25%. We adopt the same numbers
for the purpose of comparing Japan with the U.S., and the similarities between the estimates
adopting those specifications in all, young and mature firms (Figures 2(A)(a), 2(A)(c) and2(A)(d), respectively) suggest that the numbers are appropriate for Japanese firms. Although
MSV (p. 298) document that the theoretical justification for these particular numbers is not verystrong, one reason for adopting the 5% ownership level is relevant to Japan, in that it is also used
as a point of mandatory public disclosure of ownership under Japan’s Financial Instruments andExchange Act (for the U.S., see MSV pp. 298-299).
18

14

industry fixed effects are controlled. In all columns from (1) to (3) in Tables 5(C)(a) and 5(C)(b),year fixed effects are controlled, and industry or firm fixed effects are also considered whereindicated.

4-2-2. Adjusted Fama-MacBeth and OLS regressions
Turning to the adjusted FM regressions in Table 5(A), the linear specifications (m) are
statistically significantly positive at the 1% level in all firms (column (1)). Said differently, thesimple linear relation between managerial ownership (m) and Tobin’s q is strongly significantly
positive, which is opposite to the findings on American firms (FFST p. 48 Table 2 Panel A
columns (1) and (4)). The result is due to the subset of young firms (column (7) in our Table
5(A)), rather than mature firms in which the coefficient of m is negative and statisticallyindistinguishable from zero (column (10)).
When we decompose the linear relation by spline specifications (m1, m2 and m3), therelations between the first variable (m1) and Tobin’s q become negative at the 1% significancelevel, and those between the second variable (m2) and q remain strongly significantly positive inall firms (column (2) in Table 5(A)). The results are also relevant to the 500 largest firms(column (5)).
The main implications hold when we use OLS regressions controlling for both fixed
year and industry effects and adopting standard errors robust to both clustering at firm-level andheteroscedasticity, except that the statistical significance on the relation between managerial
ownership and Tobin’s q disappears in the 500 largest firms (columns (4) to (6) in Table 5(B)),
which is similar to the results for American firms (FFST p. 49 Table 2 Panel B columns (4) to(6)).
Figure 2(A) draws the relation between managerial ownership and Tobin’s q as
implied by our estimates reported in Table 5(A), which is comparable to FFST (p. 34 Figure 2, p.
35 Figure 3). FFST (in the abstract, pp. 27-28, p. 34 Figure 2, p. 35 Figure 3) show that therelation between a firm’s managerial ownership and Tobin’s q is systematically negative, and15

when they restrict their sample to larger firms, their findings are consistent with the past
literature, showing an increasing and concave relation between managerial ownership andTobin’s q. American and Japanese firms are relatively similar in their 500 largest firms in that the
hump-shaped relation is observed in the spline specifications (FFST p. 35 Figure 3; our Figure2(A)(b)), at which point our analysis is consistent with the prior literature on American firms.
However, in all Japanese firms, the relation between a firm’s managerial ownership and Tobin’s
q is positive in general (Figure 2(A)(a)). In other words, the relation appears relatively similar
between American and Japanese larger firms but different among all firms, and the difference isthe key to the issue.
We find that the positive relation in all firms is due to the subset of young firms (Figure2(A)(c)) rather than mature firms (Figure 2(A)(d)). Young firms are still in the process of being
widely held (Figure 1), and young firms are more likely to be in the range of 25% or more inmanagerial ownership (m) than mature firms (Tables 1(B)(c) and 1(B)(d)). These young firms
with high m appear to have higher Tobin’s q than other young firms or mature firms (Tables
1(B)(c) and 1(B)(d)), and the distribution appears to contribute to the positive shape in all firms(Figure 2(A)(a)).
We also learn that the relation between a firm’s managerial ownership and Tobin’s q ispartly negative in all firms when spline specifications are deployed and managerial ownership is
5% or less (the coefficient of the ownership term m1 is statistically significant at the 1% level.
column (2) in Table 5(A), Figure 2(A)(a)). The statistically significant partial negative relation isobserved in all firms because of the subset of mature firms (column (11) in Table 5(A), Figure2(A)(d)). This suggests that, considering the number of firm-years grouped by level of m (Tables
1(B)(a), 1(B)(c) and 1(B)(d)), the relation between managerial ownership (m) and Tobin’s q in
all firms is mostly determined by mature firms when ownership is 5% or less (expressed by theterm m1), and is impacted by young firms when it is more than 5% (m2 and m3) (columns (2),(8) and (11) in Table 5(A), Figures 2(A)(a), 2(A)(c) and 2(A)(d)). These findings are robust to
the inclusion of year fixed effects and the adoption of standard errors robust to both clustering at

16

firm-level and heteroscedasticity (columns (2), (8) and (11) in Table 5(B)).

4-2-3. Managerial ownership and Tobin’s q conditioning on past liquidity
FFST (in the abstract, pp. 27-28) also document that their seemingly contradictory
results are explained by cumulative past performance and liquidity. Specifically, FFST (p. 28)
observe that illiquid firms are more likely to be low-Tobin’s q firms with high managerial
ownership.
Thus, we report our estimates of managerial ownership and Tobin’s q conditioning on
past liquidity (Table 6), which is comparable to those of FFST (p. 51 Table 4). We also estimate
Tobin’s q on the subset of firms with the highest and lowest past liquidity (FFST p. 18; our Table
6). We find that, in Japanese firms, the quadratic terms (m and m^2) are statistically strongly
significant in the low liquidity columns (columns (3), (4), (7) and (8) in Table 6), and the positive
and negative signs of those terms are the same between American and Japanese firms whenthose terms are statistically significant in both (FFST p. 51 Table 4; our Table 6).
The results show that the relation between a firm’s managerial ownership and Tobin’s
q is also different in Japanese firms depending on the liquidity history (Table 6). For firm-years
in the low liquidity bracket, the relation is inversely hump-shaped and mostly negative, nomatter whether Amihud or FHT illiquidity measures are used (columns (3), (4), (7) and (8) in thesame table). In other words, the firm-years in the low liquidity bracket have a different relation
between managerial ownership and Tobin’s q compared to those in the high liquidity bracket, atwhich point American and Japanese firms are similar (FFST pp. 18, 51 Table 4; our Table 6).

4-2-4. The effect of ownership change on Tobin’s q
We consider the effect of ownership change on Tobin’s q in OLS regressions, while
controlling for fixed year and industry effects (Table 7). The explanatory variable ownershipchange is defined as the difference between initial m (first observation for a firm) and present mlagged by one period. A positive ownership change means a decline in m over the period.

17

The coefficient of the variable ownership change is significantly positive at the 1%
level in all firms (column (1) in Table 7), suggesting that the decline in managerial ownershipfrom the first year to the last is associated with higher Tobin’s q in the current year. The result
holds when we restrict our sample to the subset of young firms, mature firms or firms thatexperience an IPO during the sample period (columns (2), (3) and (4), respectively). Thesefindings are consistent with those of American firms (FFST p. 52 Table 5).19

4-2-5. Impacts of fixed effects
We further clarify the impacts of fixed effects on the relation between managerial
ownership and Tobin’s q in panel regressions (Table 5(C)).
Simply put, we confirm that the significant relation becomes less strong when we
control for both fixed year and firm effects in the fixed effects model (columns (3) in Tables
5(C)(a) and 5(C)(b)). This is similar to what is reported for American firms (HHP p. 372), in
which the managerial ownership variables are significant only in the pooled model with no othervariables and in the model with only industry fixed effects (HHP pp. 372, 374-375 Table 5(A)).20

4-3. Robustness
In the spirit of FFST (pp. 13-15, p. 50 Table 3), we report results of additional
robustness tests in Table 5(D). In column (2), we add industry x year fixed effects to theregression in column (1), and the results confirm that allowing industry effects to vary by year
has almost no impact on our estimates. Next, as in Gompers, Ishii and Metrick (2010, p. 1069),
Unreported robustness tests confirm that the coefficients remain strongly significantly
positive for all firms and in the subsets of young firms, mature firms and firms that experiencean IPO during the sample period when we estimate Tobin’s q as median regressions, or adopt a
log transformation or -1/q transformation, meaning that the results are robust to bothmeasurement error and the influence of outliers (for the robustness tests, see Section 4-3).
20
MSV (p. 293) find that Tobin’s q first increases, then declines, and finally rises as managerial
ownership increases. HHP (pp. 372-373) document that the MSV’s specification is robust to theinclusion of observable contracting determinants and industry dummies, but once they control
for both observable firm characteristics and firm fixed effects, changes in managerial ownershiplevels have no statistically significant effect on Tobin’s q.
19

18

we estimate three different variations of our specification. The first variation deploys robust
regression to deal with measurement error, to which estimates of Tobin’s q are subject, by
estimating a median regression in which the sum of absolute residuals is minimized and which isless sensitive to outliers (column (3) in Table 5(D)).21 The second variation adopts a logtransformation to reduce the influence of outliers (column (4) in the same table). The third
variation uses −(1⁄𝑞 ) as the dependent variable (column (5)). The coefficients of theownership terms (m1, m2 and m3) are qualitatively similar, and all the coefficients are
statistically significant at the 1% level (columns (1) to (5)). The results confirm that our findings
reported in Section 4-2-2 are robust to both the measurement error and the influence ofoutliers.22
Furthermore, we graphically show the relation between managerial ownership andTobin’s q estimated by median regressions (Figure 2(B)). Consistent with the results of ourrobustness tests (Table 5(D)), the figures are similar to those grounded on our main results(Figures 2(B) and 2(A), respectively), except that the hump-shaped relation in the 500 largest
firms in spline specifications is less clearly observed (Figures 2(A)(b) and 2(B)(b)), and therelation becomes virtually similar to that of mature firms (Figures 2(B)(b) and 2(B)(d),respectively).
Finally, in the spirit of FFST (p. 15), we estimate OLS regressions for three different
subperiods of six years each (unreported). We find that the simple linear relation between m andTobin’s q is significantly positive at the 1% level in each subperiod. The results further confirm
that the relation observed in the spline specifications is qualitatively similar to that in our main
estimates in each subperiod, and the coefficients are often strongly significant (the signs of theConsidering the point raised by Gormley and Matsa (2014, p. 617) that demeaning thedependent variable with respect to the group produces inconsistent estimates and can distortinference, we do not use industry-adjusted Tobin’s q in our median regressions.
22
Unreported robustness tests further confirm that the relation between managerial ownershipand Tobin’s q often becomes stronger in statistical significance in young and mature firms when
Tobin’s q is estimated as median regressions or when a log transformation or -1/q transformation
is used.
21

19

coefficients of m1, m2 and m3 are the same as those in columns (2) in Tables 5(A) and 5(B)).

4-4. Brief summary
Overall, we find that, the relation between managerial ownership and Tobin’s q isrelatively similar between American and Japanese larger firms in that the hump-shaped relation
is observed in the spline specifications (FFST p. 35 Figure 3; our Figure 2(A)(b)), at which point
our analysis is consistent with the prior literature on American firms.
However, in all Japanese firms, the relation between a firm’s managerial ownershipand Tobin’s q is positive in general (Figure 2(A)(a)), and the positive relation is robust to boththe measurement error and the influence of outliers. In other words, American and Japanesefirms appear relatively similar in their 500 largest firms but different for all firms, and thedifference is the key to the issue. We find that the positive relation in all firms is due to the subsetof young firms (Figure 2(A)(c)) rather than mature firms (Figure 2(A)(d)). Young firms withhigh m appear to have higher Tobin’s q than other young firms or mature firms (Tables 1(B)(c)and 1(B)(d)), and the fact that more firms are distributed in the range of 25% or more in m inyoung firms than in mature firms appears to contribute to the positive shape in all firms (Figure2(A)(a)). The results suggest that the fraction of newly listed firms is a decisive factor in therelation between managerial ownership and firm value in all firms.

5. External validities of the theories and empirical evidence on American firms
Jensen and Meckling (1976, p. 305) defined the concept of agency costs, in relation to
the “separation and control” issue. It seems reasonable to assume that if managers are wellincentivized to maximize firm value by holding equities of the firm, then their equity ownershipprobably has positive effects on the value of the firm. Past studies abound on American firms,
which are primarily on a small number of the largest firms. However, by using more than 50,000
firm-years from 1988 to 2015, the recent work FFST show that the relation between a firm’s
managerial ownership and Tobin’s q is systematically negative, and by doing so corrects those20

shortcomings.
Although the number of equities owned by managers of listed firms is disclosed andthe information is available as data, the literature on Japanese firms analyzing the relation
between managerial ownership and Tobin’s q is scarce. To the best of our knowledge, our paper
is the first to analyze Japanese firms in large datasets and clarify the relevance and external
validity of the theories and empirical evidence in the context of American firms.
American and Japanese firms are relatively similar in that, for their 500 largest firms,
the hump-shaped relation is observed in the spline specifications (FFST p. 35 Figure 3; ourFigure 2(A)(b)), at which point our analysis is consistent with the prior literature on American
firms. However, in all Japanese firms, the relation between a firm’s managerial ownership andTobin’s q is positive in general (Figure 2(A)(a)), and the positive relation is robust to both themeasurement error and the influence of outliers (Figure 2(B)(a)). In other words, American andJapanese firms appear relatively similar in their 500 largest firms but are different in all firms,
and the difference is the key to the issue.
We find that the positive relation in all firms is due to the subset of young firms (Figure2(A)(c)). Young firms with high managerial ownership (m) appear to have higher Tobin’s q thanother young firms or mature firms (Tables 1(B)(c) and 1(B)(d), respectively), and the fact that
more firms are distributed in the range of 25% or more in m in young firms than in mature firms
appears to contribute to the positive shape for all firms (Figure 2(A)(a)). The general reduction inm after an IPO is the primary factor contributing to the change in m (Figure 1, Table 4(A)).
Concurrent industry-adjusted and market returns and lagged industry-adjusted returns arestrongly significant predictors of a large drop in m for young firms (column (7) in Table 4(B)).
The results suggest that the fraction of newly listed firms is a decisive factor in the relation
between managerial ownership and firm value.
Different from what is reported for American firms (FS p. 351 Table 3), Japanese firmsthat become financially constrained are more likely to experience a large decrease or increase inmanagerial ownership (m) (columns (1) and (4) in our Table 4(B)), whereas financial constraints

21

are not significant predictors of a large decrease in m for American firms (FS p. 351 Table 3).
Our results suggest that Japanese firms with a history of high or low liquidity havesignificantly higher or lower managerial ownership (m) when controlling for fixed year andindustry effects (columns (2), (4), (6) and (8) in Table 3), which is in marked contrast to thefindings on American firms. However, the relation between a firm’s managerial ownership andTobin’s q is different in both American and Japanese firms depending on the liquidity history(Table 6). For firm-years in the low liquidity bracket, the relation is inversely hump-shaped andmostly negative (columns (3), (4), (7) and (8) in Table 6). The result shows that the firm-years in
the low liquidity bracket have a different relation between managerial ownership and Tobin’s q
compared to those in the high liquidity bracket, at which point American and Japanese firms are
similar (FFST pp. 18, 51 Table 4; our Table 6).
Our results also confirm that the significant relation becomes less strong when we
control for both fixed year and firm effects in the fixed effects model (columns (3) in Tables
5(C)(a) and 5(C)(b)). It is similar to what is reported for American firms (HHP p. 372).

6. Conclusion
We focus on Japanese listed firms in the context of the relation between managerial
ownership and Tobin’s q. By using 59,064 firm-years of 4,905 unique Japanese firms from 2000
to 2017, we find that the relation between a firm’s managerial ownership and Tobin’s q is
positive in general (Figure 2(A)(a)). The positive relation is robust to both the measurement error
and the influence of outliers, and it is due to the subset of young firms (Figure 2(A)(c)). Youngfirms with high managerial ownership (m) appear to have higher Tobin’s q than other young
firms or mature firms (Tables 1(B)(c) and 1(B)(d), respectively), and the fact that more firms are
distributed in the range of 25% or more in m in young firms than in mature firms appears tocontribute to the positive shape for all firms (Figure 2(A)(a)). The general reduction in
managerial ownership (m) after an IPO is the primary factor contributing to the change in m
(Figure 1, Table 4(A)). Concurrent industry-adjusted and market returns and lagged22

industry-adjusted returns are strongly significant predictors of a large drop in m for young firms(column (7) in Table 4(B)). The results suggest that the fraction of newly listed firms is a
decisive factor in the relation between managerial ownership and firm value. When we restrict
our sample to the 500 largest firms, the hump-shaped relation is observed in the spline
specifications (Figure 2(A)(b)), at which point our analysis is consistent with the prior literatureon American firms.
Our results suggest that Japanese firms with a history of high or low liquidity havesignificantly higher or lower managerial ownership (m), when controlling for both fixed year
and industry effects, which is in marked contrast to the findings on American firms. However,
the relation between a firm’s managerial ownership and Tobin’s q is different in both Americanand Japanese firms depending on the liquidity history (Table 6). For firm-years in the low
liquidity bracket, the relation is inversely hump-shaped and mostly negative (columns (3), (4),(7) and (8) in Table 6). The result shows that the firm-years in the low liquidity bracket have a
different relation between managerial ownership and Tobin’s q compared to those in the highliquidity bracket, at which point American and Japanese firms are similar (FFST pp. 18, 51
Table 4; our Table 6).

23

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26

Appendix A. Variable descriptions

27

Appendix A. Continued.

For ownership variables (m, m^2, m1, m2 and m3) and HHP’s control variables, see HHP (p. 367). For FS explanatory
variables, see FS (p. 351 Table 3, p. 352 Table 4).

28

Appendix B. Estimation of Tobin’s q
As is common in the literature, we follow Kaplan and Zingales’ (1997, p. 177) method for the estimation of
Tobin’s q.23 More specifically, we measure Tobin’s q as the market value of assets divided by the book value of
assets where the market value of assets equals the book value of assets plus the market value of common equity
less the sum of the book value of common equity and balance sheet deferred taxes.24 We calculate q at the endof a firm’s fiscal year.

For the estimation, we treat Tobin’s q as a missing value if at least one of the following four variables is missing:
Nikkei FQ codes B01110 [total assets],25 A01057 [the number of shares issued at the end of period], C01085[capital stock] and FDS Japanese Listed Stocks Daily Return Data code CLOSE_P [stock closing price].
Following McConnell and Servaes (1990, p. 600), we delete nonfinancial firms with Tobin’s q greater than 6.0
to preclude problems with outliers. We also treat negative Tobin’s q as a missing value. We exclude firm-years
with missing Tobin’s q.

Hoshi and Kashyap (1990, pp. 390-398) construct a tax-adjusted q for Japanese firms, while maintaining
Hayashi’s (1982) assumptions which guarantee the equality of marginal and average q. Hayashi and Inoue(1991, pp. 737-739) measure an asset-aggregated, tax-adjusted q for Japanese firms.
24
We do not follow Peters and Taylor’s (2017, p. 256) method because the amount of past intangible
investments, which is needed to calculate internally created intangible capital, is not generally disclosed oravailable for Japanese firms.
25
Furthermore, we require firms to have total assets greater than zero.
23

29

Appendix C. Single and dual-class firms(a) Number of single and dual-class firms
This table reports the number of single and dual-class firms during the sample period. We exclude dual-class firms from the sample.

(b) Summary statistics
In the spirit of Gompers, Ishii and Metrick (2010, p. 1059 Table 3), this table gives means and medians of three variables for single and dual-class firms.

Assets is the book value of assets in 100 million yen (Nikkei FQ code B01110 [total assets]); Debt/Assets is the ratio of long-term debt (Nikkei FQ code C01057[noncurrent liabilities]) to Assets; Age is ﬁrm age in years, which is defined as the difference between the date on which a firm was established (Nikkei FQ code
PRMTD1 [actual date of foundation]) and the date on which the firm’s fiscal year ends. Signiﬁcant differences for the means are indicated at the 1% level by***. The Wilcoxon rank-sum test p-values for the medians are given in parentheses in the eighth column.

30

Table 1. Summary statistics(A) Summary statistics for the variables in the analysis
The table reports the summary statistics for the variables adopted in the analysis.

p10, p50 and p90 are the 10th, 50th and 90th percentile, respectively, of the variables (hereafter the same
applies). Because the HHP control variable SIGMA is available for all firm-years in our analysis, SIGDUM is
not included as an explanatory variable in the regressions in the following tables.

31

Table 1. Continued.
(B) Mean values of Tobin’s q, grouped by level of managerial ownership
The tables report mean values of Tobin’s q, grouped by level of managerial ownership (m).
(a) All firms(b) 500 largest firms(c) Young firms(d) Mature firms

32

Table 1. Continued.
(C) Summary statistics by fiscal year
The tables report the summary statistics by fiscal year. They are comparable to those of FFST (p. 47 Table 1).
(a) All firms(b) 500 largest firms

33

Table 1(C). Continued.
(c) Young firms(d) Mature firms

34

Table 2. Determinants of managerial ownership
The table follows HHP (p. 368 Table 4(A)). The specifications reported in the table all model the fraction ofmanagerial ownership (m), by regressing the transformed dependent variable 𝐿𝑁(𝑚⁄(1 − 𝑚)) on the
explanatory variables indicated below. Intercept terms and year dummies are included for all the regressions but
not reported.
The following are also applied to all tables in the paper. Variable descriptions are given in Appendix A. The
sample period is from 2000 to 2017. Coefficients marked with *, ** and *** are statistically significant at the
10%, 5% and 1% levels, respectively. Standard errors robust to both clustering at firm-level andheteroscedasticity are reported in parentheses (except for adjusted FM regressions). For adjusted FM
regressions, adjusted Fama-MacBeth standard errors are reported (for the adjustment, see Section 3-1-3). Year
fixed effects and/or fixed effects at the industry or firm level are included where indicated, but not reported. We
adopt TSE 33 industry classifications for controlling industry fixed effects.

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Table 3. Effects of past stock liquidity on managerial ownership
The table reports estimates of adjusted FM and OLS regressions of managerial ownership (m) on measures of paststock liquidity. Managerial ownership (m) is regressed against a measure of past liquidity (Amihud or FHT measure)and HHP control variables. High liquidity years (Amihud) and high liquidity years (FHT) or low liquidity years(Amihud) and low liquidity years (FHT) are the fractions of years during the sample period that a firm spent in the highor low liquidity bracket, where high or low liquidity refers to the top or bottom quartile of the annual liquidity
distribution (as in FFST p. 20). The table is comparable to that of FFST (p. 53 Table 6). For other points, see Table 2.

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Table 4. Large changes in managerial ownership and changes in explanatory variables(A) Fraction of firm-years with a large change in ownership
The table shows means of three dummy variables that are equal to one if a firm experiences no change, a large drop or a large increase, respectively, in managerial
ownership (m), and otherwise equal to zero. As in FS (p. 346), a large drop (increase) is defined as a change in m larger than 2.5% in absolute value. The dummy
variable No change takes one if a firm has a small change in ownership at 2.5% or less in absolute value, and otherwise zero.

Signiﬁcant differences for the means between young and mature firms are indicated at the 1% level by ***.

37

Table 4. Continued.
(B) Decomposition of large ownership changes and changes in explanatory variables
In the spirit of FS (p. 351 Table 3, p. 352 Table 4), the table reports marginal effects of probit regressions of both a) large decreases (columns (1), (7) and (9)) and large increases(columns (4), (8) and (10)) in managerial ownership (m) and b) the decomposition of the large decreases (columns (2) and (3)) and increases (columns (5) and (6)) on changes
in explanatory variables.
The dependent variable in columns (1), (4) and (7) to (10) is equal to one if m decreases (increases) by more than 2.5% in absolute value, and zero otherwise. The
decomposition in columns (2) to (3) and columns (5) to (6) is done as in Helwege, Pirinsky and Stulz (2007, p. 1009 Eq. (1)). Specifically, as in FS (pp. 352-353), we set theindicator variable for a large decrease or increase in shares held equal to one if the first term of their Eq. (1) or our Eq. (3) (the numerator change) is more than 2.5% in absolutevalue, and that in shares outstanding equal to one if the second term (the denominator change) exceeds 2.5% in absolute value (see Section 3-3-1).
The first explanatory variable is the level of m lagged by one period. The other explanatory variables are expressed as changes, and all accounting variables are calculated aschanges from two ﬁscal years prior to the end of the previous ﬁscal year (for variable descriptions, see Appendix A). Lagged industry-adj. return and lagged market return arethose over the previous ﬁscal year. A ﬁnancially constrained (unconstrained) indicator variable is equal to one if the ﬁrm becomes ﬁnancially constrained (unconstrained). A no
R&D dummy that is equal to one if the ﬁrm has missing research and development expenditures for a fiscal year is included in the regressions, but not reported.
Year ﬁxed effects are controlled in the regressions. Standard errors are corrected for clustering at the ﬁrm level, but not reported. For other points, see Table 2.

38

Table 4(B). Continued.

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Table 5. Determinants of Tobin’s q(A) Adjusted Fama-MacBeth regressions
In the spirit of FFST (p. 48 Table 2 Panel A), this table reports estimates of adjusted FM regressions of Tobin’s q on managerial ownership and HHP control variables. For otherpoints, see Table 2.

40

Table 5. Continued.
(B) OLS regressions
In the spirit of FFST (p. 49 Table 2 Panel B), this table reports results of OLS regressions of Tobin’s q on managerial ownership and HHP control variables. For other points,
see Table 2.

41

Table 5. Continued.
(C) Panel regressions
As in HHP (pp. 374-375 Table 5(A), pp. 376-377 Table 5(B)), the specifications reported in these tables all model
Tobin’s q as a function of the explanatory variables indicated below. In the left table (Table 5(C)(a)), the influence of menters as a quadratic function, whereas spline specifications are adopted in the right table (Table 5(C)(b)). For otherpoints, see Table 2.
(a) Quadratic specifications(b) Spline specifications

42

Table 5. Continued.
(D) OLS regressions: additional robustness tests
In the spirit of FFST (p. 50 Table 3), this table reports estimates of OLS regressions of Tobin’s q on managerial
ownership and HHP control variables in spline specifications. Column (1) reproduces the result provided in column (2)in Table 5(B). In column (2), year and industry fixed effects are replaced by industry x year fixed effects. The results ofa median regression are shown in column (3), and standard errors robust to clustering at firm-level are reported inparentheses. The dependent variable is transformed into the natural logarithm of Tobin’s q in column (4), and into−(1⁄𝑞 ) in column (5) (for the transformation, see Section 4-3). For other points, see Table 2.

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Table 6. Managerial ownership and Tobin’s q conditioning on past liquidity
This table reports estimates of adjusted FM and OLS regressions of Tobin’s q on managerial ownership and HHP
control variables conditioning on liquidity history. “High liquidity” or “low liquidity” in the table specifies the years
during the sample period that a firm spent in the high or low liquidity bracket, which means the top or bottom quartileof the annual liquidity distribution. This table is comparable to that of FFST (p. 51 Table 4). For other points, see Table
2.

44

Table 7. The effect of ownership change on Tobin’s q
In the spirit of FFST (p. 52 Table 5), this table reports estimates of OLS regressions of Tobin’s q on the ownershipchange and the HHP control variables. The explanatory variable ownership change is defined as the difference between
initial m (first observation for a firm) and present m lagged by one period. “Post-IPO” refers to the subset of firms thatexperience an IPO during the sample period. For other points, see Table 2.

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Figure 1. Ownership structure following an IPO
Following Helwege, Pirinsky and Stulz (2007, p. 1007 Figure 3), this figure shows the distribution of changes in m (current fraction minus initial fraction of managerial
ownership) in the years after an IPO. We exclude all firms that were widely held at the end of the first year following an IPO (m less than 10%). The initial sample is all
firms in our paper that went public during the sample period. WH10 or WH20 is the percentage of firms in which m is less than 10% or 20%, respectively.

46

Figure 2. The relation between managerial ownership and Tobin’s q(A) Adjusted Fama-MacBeth regressions
The figures delineate the relation between managerial ownership and Tobin’s q as implied by the estimates reported in
our paper. The linear specification (expressed by the black line), the quadratic specification (the blue line) and the spline
specification (the red line) in Figure 2(A)(a) correspond to columns (1), (3) and (2) in Table 5(A), respectively, andthose in the Figure 2(A)(b) are based on columns (4), (6) and (5) in the same table, respectively. Similarly, those in
Figure 2(A)(c) are founded on columns (7), (9) and (8) in the same table, respectively, and those in Figure 2(A)(d) are
grounded on columns (10), (12) and (11) in the same table, respectively. Following MSV (p. 301 Figure 1), theintercepts conform to the mean values reported in Table 1(B). The figures are comparable to those presented
graphically in the literature (MSV p. 301 Figure 1; FFST pp. 34-35 Figures 2 and 3).
(a) All firms(b) 500 largest firms(c) Young firms(d) Mature firms

47

Figure 2. Continued.
(B) Median regressions: robustness
The figures correspond to Figure 2(A), but the coefficients of ownership terms are estimated by unreported median
regressions as a robustness test. The results expressed in spline specifications (the red line) in Figure 2(B)(a) are thesame as those reported in column (3) in Table 5(D).
(a) All firms(b) 500 largest firms(c) Young firms(d) Mature firms

48