Studies investigating the effect of managerial ownership on firm value for established
firms have identified a nonlinear relationship that allows for both the existence of the
alignment and entrenchment hypotheses. We model a cubic form of the relationship in IPO
firms. Our findings indicate that increases in managerial ownership are associated with
better firm performance within both the 0–31% and 71–100% ownership ranges.
Alternatively, greater managerial ownership is negatively associated with firm performance
in the 31–71% ownership range. Morck et al. report turning points of 5% and 25%
for established US firms. Short and Keasey (1999) find turning points at 16% and 42% in a
sample of established United Kingdom firms. Our turning points are higher than both of
these studies. However, we study IPO firms from an emerging market while they study
established public firms from developed markets.
We also report other determinants of firm performance. It seems that older and growing
firms perform better after the IPO than other firms. In addition, firms with less bank debt
suffer a greater performance decline as firms go public, but bank debt is positively related
to cash-flow levels after the IPO. Most importantly, however, these additional determinants
do not subsume the managerial ownership findings.
By examining the operating performance of IPO firms from an emerging market and
finding a curvilinear relationship between post-IPO managerial ownership and post-IPO
performance, we make two significant contributions to the IPO literature