Managerial Incentives and Firm Valuation - Evidence from Switzerland

This paper presents an integrated analysis of the relationships between managerial share ownership (or alternatively the percentage of equity-based compensation), four additional corporate governance mechanisms, and firm value by explicitly incorporating the simultaneity of the process determining these variables into the empirical investigation. For a sample of 145 Swiss firms, we find a significantly positive valuation effect of managerial shareholdings and the percentage of equity-based compensation including shares and options. We also find significant relationships between various corporate governance proxies indicating that several mechanisms are substituted for each other. This finding clarifies the importance of using a simultaneous equations approach and treating governance mechanisms (and firm value) as endogenous variables.