McConnell and Servaes (1990) propose a quadratic model in which the coefficient on
managerial ownership is expected to be positive while the coefficient on managerial
ownership squared is expected to be negative. However, they cannot support Morck et
al.’s entrenchment findings at the intermediate ownership level. Subsequently, Short and
Keasey (1999) argue that a cubic model better describes the transition between alignment
affects to entrenchment affects and back again to alignment. Here, the coefficients on
ownership and ownership-cubed are expected to be positive, while the coefficient on
ownership-squared is expected to be negative. Their evidence supports the cubic model of
ownership structure to describe firm performance in established firms. Thus, their results
are consistent with Morck et al., but their empirical approach allows the data to determine
its own turning points. Specifically, they find an entrenchment effect when managerial
ownership is between 16% and 42%, but an alignment-of-interest effect is found
otherwise.