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Relationship between ownership structure, investment and corporate value - Essay Example

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A number of studies from different authors and researchers have found link to the relationship between ownership structure, investment, and corporate value. Generally, the management of a firm tends to prefer investments that will maximize the wealth of shareholders…
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Relationship between ownership structure, investment and corporate value
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Download file to see previous pages f such literature talks about the relationship between managerial ownership levels, the direct investment decisions made by management and the natural value of the firm.
Moreover, there were many arguing studies done in almost the same year from different authors and researchers. Just like Morck, Shleifer and Vishny (1988), McConnell and Servaes (1990), and Hermalin and Weisbach (1991) provide facts and verification of a significant non-linear relationship between corporate value and managerial ownership. They argue that corporate value increases with management equity holdings to a particular level after which entrenchment behavior becomes dominant, resulting into a decrease in firm value. Out of the three studies, it was only McConnell and Servaes (1990) that have reported no change in the relationship between corporate value and managerial holdings at certain high levels of equity ownership.
However, such earlier findings were found to formulate doubts when compared to works of Cho (1998) and Himmelberg, Hubbard and Palia (1999). Cho (1998) showed that managerial ownership had no effect on corporate value and investment but the only the corporate value that had a considerable impact on managerial ownership through the application of a two-stage least squares methodology.
One must choose an ownership structure prior to starting a business. It may come into varying types of ownership whether sole proprietorship, partnership, corporation (for-profit and nonprofit), cooperative, or limited liability company (LLC). Although these types are being utilized by many businesses, there is no one preference that fits for every business. This is for the reason that each of these ownership structures has its certain advantages and disadvantages in a business and thus the choice of ownership structure depends on the form that would best suit and meet its needs. In saying so, there would be a need for a careful evaluation of the most important considerations in ...Download file to see next pagesRead More
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