Incentives vs. entrenchment: A comparison of competing governance mechanisms

Abstract

This study explores the relationships between firm performance and the incentive and entrenchment effects of corporate governance structures. It analyzes whether the benefits of providing stock ownership to directors are greater than the potential costs of entrenching officers and directors. Using the dollar amount of stock owned by various classes of directors, the results suggest that the incentive effect dominates any costs related to entrenchment: firms with greater stock ownership outperform other firms, regardless of the degree of managerial entrenchment that may be present. This result is robust to firm size, growth opportunities, time period, and other controls. The implication for policy-makers is that providing directors with incentives through stock ownership remains a very effective corporate governance mechanism.