Simultaneous Determination of Managerial Ownership, Financial Leverage and Firm Value

Controlling for previous identified determinants and modeling managerial ownership, leverage and firm value as jointly endogenous, we use hi-tech firm-level panel data covering 139 firms from china stock market for 2002-2005 to examine simultaneously the determinants of managerial ownership, leverage, and firm value as a system of three equations. The empirical analysis shows a significant inverse relation between managerial ownership and leverage which reveal the existence of a substitution monitoring effect between debt and the managerial group. We contend that managers of firms with higher stock eschew choosing debt to minimize frequent external monitoring. Additionally, we document an inverse U-shaped relationship between Managerial ownership and firm value even if managerial ownership is endogenous. Finally, we also find that leverage and firm value are influenced jointly positively Our analysis provides empirical supportive evidence for Chinese hi-tech firms to use managerial ownership and leverage to improve the corporate governance efficiency and firm value.