November 23, 1999
Aswath Damodaran, Kose John, and Crocker H. Liu
ABSTRACT
We formulate several testable hypotheses on managerial motivation and test our hypotheses by using a sample of 128 organizational form changes in the real estate industry. We find that firms that switch to a more restrictive (tighter) organizational structure have increases in stock value, and have higher managerial ownership of stocks and options. Firms moving to a less restrictive (looser) structure have larger wealth effects when the degree of monitoring is higher. Distressed firms (with higher creditor monitoring) moving into a looser organizational form have higher wealth effects than healthy firms. In fact, these wealth effects are decreasing in the level of free cash flow to a looser organizational form have high wealth effects when accompanied by managerial replacement than otherwise.
Damodaran: (212) 998-0340 adamodar@stern.nyu.edu
John: (212) 998-0337 kjohn@stern.nyu.edu
Liu: (212) 998-0353 cliu@stern.nyu.edu
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