Managerial Ownership and Firm Performance : Evidence From the 2003 Tax Cut ∗

Empirical evidence on the causal effects of managerial ownership on firm performance has been elusive due to a lack of within-firm variation and credible empirical design. This paper identifies this causal effects exploiting the 2003 Tax Cut as a quasi-natural experiment, which increased the net-of-tax effective managerial ownership. Consistent with predictions from agency theory, our difference-indifference empirical design uncovers a significant and hump-shaped improvement in firm performance measured by Tobin’s Q with respect to the level of managerial ownership due to the tax cut. Moreover, the increase in performance is more pronounced for firms where agency problems are relatively more severe as well as firms under weak alternative governance mechanisms, further demonstrating a rise in managerial ownership incentive being the underlying channel for our results. Our results are robust to examination of pre-trend and placebo tests, accounting measures of firm performance as well as other considerations.