This paper studies the effect of managerial ownership on performance and the determinants of managerial ownership for small and medium-sized private companies. We use a panel of around 1300 firms in the German business-related service sector for the years 1997-2000. Managerial ownership up to around 80 per cent has a positive impact on firm performance (incentive effect); for higher shares the effect becomes negative (entrenchment effect). Moreover, risk-aversion of managers and signalling of firm quality leads to a non-linear relationship between managerial ownership and the risk exposure of a firm. The determinants of performance and ownership are estimated simultaneously.

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April 2002     Paper Number CEPDP0528

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