Adjustments in managerial ownership and changes in firm value

This paper investigates the relation between adjustments in managerial ownership and changes in firm value from two perspectives. First, we examine whether moving toward the optimal level is an important concern for managers when they adjust their ownership. Second, we analyze the effect of changes in managerial ownership on changes in Tobin's q by focusing on how the market reacts differently between the adjustments toward optimal ownership and other discretionary adjustments. Using panel data of non-financial companies listed on the Taiwan Stock Exchange, we find evidence to show that managers significantly increase their ownership when there are below-optimal deviations, whereas reductions in ownership for above-optimal deviations are not significant. Empirical results also show that the market reacts positively to changes in ownership for removing deviations on either side of the optimal level. Discretionary increases or decreases in managerial ownership are detrimental to firm value. Our findings are robust to using different measures of changes in managerial ownership and to certain modifications in the empirical model. (C) 2012 Elsevier Inc. All rights reserved.