Corporate Ownership and Managers' Selection

Francesco Lippi and Fabiano Schivardi

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Overview Very impressive combination of theory, OLS, and

structural estimation

The paper suggests that firms that don’t maximize profits will employ worse managers

Deviations from profit max. hurts profits due to their adverse effect on the decision of which manager to retain

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Theory: managerial retention Managers need to pass profitability thresholds in order to be

retained: The threshold is above av. for managers that do not develop special

relationships with management but below av. otherwise

Remark 1: Under managerial MH, setting a high threshold for managers who do not develop special relationship with owners may have a positive effect on managerial incentives – the owners “commit” to replace managers unless they perform really well

Remark 2: If managers can invest in either productive activities or developing special relationships we will prob. have an even bigger inefficiency

Remark 3: If the firm is headed by a management team, how would the owners be able to measure the performance of an individual manager and tell if was above or below the threshold?

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Theory: managerial seniority

An increase in the importance of special relationships has an ambiguous effect on the av. seniority of managers: Managers with special relationships are

more likely to become senior Managers with no relationships are less

likely to become senior

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Theory: profitability

An increase in the importance of special relationships lowers the ex. profitability of the firm: It distorts the efficient replacement rule

of managers making it either too aggressive or too soft

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Empirical results: ownership type and TPF Firms that don’t maximize profits (family and public firms)

have lower TFP

Remark: Why is TFP a good measure of profitability? Suppose firm A chooses bad projects but implements them

efficiently but firm B chooses great projects but implements them inefficiently – productivity will not predict correctly that firm B is more profitable

Why not assume that managers are another input and then measure their “productivity”? Say,

Y = MKL

How do we know that TFP is low because of management and not due because of ownership (say if the firm’s strategy is determined by owners rather than managers – public firms may wish to over employ workers for social reasons)

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Empirical results: ownership type and TPF 2 Remark: Why would family firms not

maximize profits?

Surely, the controlling stake of the family in the firm matters: the higher it is, the bigger the weight the family will place on profits (presumably it can be tested)

Remark: how do you defined a firm to “family owned” (what’s the relevant UCR?) How do you define a firm to be publicly owned (what’s the gov’t UCR)?

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Empirical results: managerial seniority and TPF Seniority and TPF are positively correlated

for inst. or foreign firms, but negatively correlated for family and public firms

Remark: the model assumes that only the

firm decides whether a manager stays or not. But what if managers can get outside offers and decide to leave? A manager who stays in a family or a public firm sends a bad signal to the market – how does that affect matters?

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Ownership type and managerial seniority

Family and public firms have more senior manager than holding or inst. and foreign firms

Remark: could this be due to the better prospects of promotions inside the firm?

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Leverage and corporate control Berkovitch et. al JEMS 2000 show that firms

with higher leverage will replace their managers more often. What happens when that is factored in?

Managers may lose their jobs following takeovers. If family and public firms are less likely to be taken over, working there is safer. How would that affect matters (weaker incentive to exert effort)?