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Table 2:
Variable definitions and theoretical justifications Click to view model
and click here to view part 1 of table
2. Table 2, Part 2: The ownership equation, EQ2 |
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Variable
name |
Definition,
theoretical justification and data source |
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OWi,t Managerial ownership |
A generic abbreviation
for managerial ownership measured at time t for firm i. One of the following
two specific measures is applied:
ownership by all officers and directors and insider ownership (see
below). As a dependent variable in EQ2 it enters the regression using the
following logarithmic transformation: |
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OffDirOwi,t
Officer and director ownership |
This is
calculated as total shares held by officers and directors as a group as
reported in the Proxy report divided by common shares outstanding. Common
shares outstanding are taken in their entirety from the balance sheet of a
10-K or 10-Q filing.IV Data source: SEC-Piranhaweb. |
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InsOwi,t
Insider ownership |
This is
calculated as total shares held by the seven largest corporate insiders as
reported from ‘form 3 and form 4 statements’ and divided by common shares
outstanding. Insider shares held is the total number of shares currently held
by a particular officer, director, beneficial owner and principal stockholder
owning 10 percent or more of the company stock. Officers, directors and beneficial owners
are only included if they hold at least 1000 shares.IV Data source:
SEC-Piranhaweb. |
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Expected performance |
This
variable is either measured by Recon (consensus stock recommend) or by N5YrEPSG (next five-year growth in earnings
per share). For a detailed discussion of these measures and why they may be
proxies for the managers’ performance expectations, see Chapter 5, Section
3.3. The measurement details are given below in this table, Part 3. Here it
suffices to say that as an explanatory variable in the ownership equation its
parameter should be significantly negative (positive) when measured by Recon
(N5YrEPSG) to support the insider reward or the insider investment argument
of Hypothesis 4 as explained in Chapter 2, Section 2.4. Get
dissertation. |
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Pi,t-1 Past performance |
A generic abbreviation
for financial performance measured at time t-1 for firm i. One of the
following two specific measures is applied: three-year average return on
assets and two-year return on assets (see below). |
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3YrAvgRonAi,t-1 Three-year average return on assets |
The
three-year average return on assets is simply calculated as (RonAi,t-1 + RonAi,t-2+ RonAi,t-3)/3. For a
definition of RonA see above. The parameter to 3YrAvgRonA should be significantly
positive according to the reward argument of Hypothesis 4 as explained in
Chapter 2, Section 2.4. Get
dissertation.
Data
source: Worldscope-Piranhaweb. |
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2YrAvgRonAi,t-1 Two-year average return on assets |
Same as
3YrAvgRonA above apart from limiting the relevant past to two years instead
of three years. Data source: Worldscope-Piranhaweb. |
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MarkCapi,t Market capitalization |
MarkCap is
the year end market capitalization of all outstanding shares all types
included.I As an explanatory variable in EQ2 it is hypothesized
that higher market value is negatively related to managerial ownership for
the following three reasons: 1) wealth constraints saying that as value
increases it becomes increasingly difficult for managers to afford high
ownership stakes; 2) control argument saying that, ‘…a given degree of
control generally requires a smaller share of the firm the larger is the
firm.’, quoted Demsetz and Lehn [1985, page 1158]; and 3) risk argument
saying that as stock value increases the risk adverse managers need to adjust
their personal portfolio selling stocks and buying other assets to keep it
diversified. Data source: Worldscope-Piranhaweb. |
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DIndust2i,t Sector code dummies |
This is
another set of industry dummies from I/B/E/S sector code. The classification
contains 11 sectors equal to (11-1) dummies; in particular, finance, healthcare, consumer non-durables,
consumer services, consumer durables, energy, transportation, technology, basic
industries, capital goods and public utilities.II It is
hypothesized that ownership could be determined by a rough classification of
industries because of differences in the legal regulation of these industries
(see Demsetz and Lehn [1985, page 1161]). Data source: I/B/E/S-Piranhaweb. |
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DExchangei,t Stock exchange dummy |
For a
definition, see above in this table, Part 1. It is hypothesized that the
different codes of conduct that each stock exchange applies might have an
impact on the managerial ownership. For instance, firms that prefer to
disclose as little as possible about ownership may prefer exchanges that does
not add additional disclosure requirement to the ordinary legal rules about
ownership disclosure. |
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DIncorpi,t Dummy for country of incorporation |
For a
definition, see above in this table, Part 1. It is hypothesized that the
country of incorporation could determine managerial ownership through
differences in corporate laws as well as tax laws that may create different
incentives and requirements for managerial ownership. |
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Table 2, Part 3: The expectations equation, EQ3 |
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Variable
name |
Definition,
theoretical justification and data source |
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Expected performance |
A generic abbreviation
for financial performance at time t+1 as expected at time t for firm i. One
of the following two measures is applied: consensus stock recommendations and
expected average growth in earnings per share five-years ahead (see below). |
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ReConi,t
Consensus stock recommendation |
ReCon is
the
consensus stock recommendation calculated as the mean of several similarly
scaled grades of common stock delivered by stock analysts from various
investment banks to I/B/E/S. In particular, common stock is graded on a
discrete scale from 1 to 5, where mark 1 is a strong buy, 2 is a buy, 3 is a
hold, 4 is a sell and 5 is a strong sell.II Data source:
I/B/E/S-Piranhaweb. |
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N5YrEPSGi,t
Next five-year EPS growth |
This is
another I/B/E/S earnings estimate suggesting the expected next five-year
growth rate in earnings per share.III Data source: Compact D
online, SEC- Global Access. |
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Pi,t
Performance |
The
financial performance is measured by either the market-to-book ratio or by
return on assets. These measures are defined above in this table, Part 1. As
an explanatory variable in the expectations equation it is expected to be
significantly positive if the performance expectations are measured by N5YrEPSG
and significantly negative if it is measured by ReCon. This relation is based
on a theory of adaptive performance expectations that is believed to be part
of a more complex story about the formation of expectations. It should also
be noted that such a relation supports the idea of endogeneity of managerial
ownership and financial performance because EQ1 and EQ2 alone do not form a
simultaneous system. More details this Chapter, Section 2.1. Get
dissertation. |
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DIndust1i,t |
For a definition and justification, see above in this
table, Part 1. |
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DExchangei,t |
For a definition and justification, see above in this
table, Part 1. |
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DIncorpi,t |
For a definition and justification, see above in this
table, Part 1. |
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