November 30, 2000
Alexander Ljungqvist and Michel Habib
ABSTRACT
We examine the relation between firm value and managerial incentives in a sample of 1,307 publicly-held U.S. firms
in 1992-1997. As predicted by Berle and Means (1932), we find that CEOs do not maximize firm value when they are
not the residual claimant: our firms have higher Tobin’s Q, the higher are CEO stockholdings. We also investigate
the incentive properties of options and find that CEOs appear to hold too many options and that these options are
insufficiently sensitive to firm risk. Our results do not appear to be driven by endogeneity biases. To assess
the economic significance of the suboptimal provision of incentives, we compute an explicit performance benchmark
which compares a firm’s actual Tobin’s Q to the Q* of a hypothetica fully-efficient firm having the same inputs
and characteristics as the original firm. The Q of the average sample firm is around 12% lower than its Q*, equivalent
to a $751 million reduction in its potential market value.
Subject: Corporate Finance
Classification: Empirical
Alexander Ljungqvist
Institution: Stern School of Business, New York University
Email: aljungqv@stern.nyu.edu
Telephone: (212) 998-0304
Homepage: http://www.stern.nyu.edu/~aljungqv/
Michel Habib
Institution: London Business School
Email: mhabib@london.edu
Telephone: 020-7262-5050
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