Managerial share ownership and operating performance: New evidence

Arifur Khan
Monash University
Australia

Balasingham Balachandran
Monash University
Australia

Abstract:
We investigate the relation between managerial share ownership and operating performance of Australian companies during the period 2000 to 2006. We first use accounting earnings to examine this relation. Arguing that earnings as a performance measure may be distorted by earnings management, we remove discretionary accruals and also use adjusted accounting earnings as a measure of performance. We document a negative relation between managerial share ownership and performance up to a certain point followed by a positive relation (U-shaped) both before and after controlling endogeneity and reverse-causality. We also document that performance affects managerial ownership but only when we use adjusted accounting earnings. We explain the unique results on the ownership-performance relation as an artefact of certain Australian institutional features that are markedly different to those in the US and the UK. We also posit that executive directors and independent directors have different ownership-performance incentives and examine these relations separately. Our analyses reveal a similar relation between ownership and performance for executive directors as for managerial ownership as a whole. However, we find no significant relation between share ownership by independent directors and either accounting earnings or adjusted accounting earnings.