The Nonlinear Relation between Agency Costs and Managerial Equity Ownership: Evidence of Decreasing Benefits of Increasing Ownership*

This paper provides a link between research that demonstrates a linear relation between financial-statement based agency cost measures and managerial equity ownership and research that documents a nonlinear relation between Tobin's Q and managerial ownership. We examine the impact of managerial equity ownership on two financial-statement based agency cost measures: asset utilization and an expense ratio, which proxy for management's efficiency in use of assets and perquisite consumption, respectively. We find that managerial equity ownership is associated with these measures of agency costs in the predicted directions, and that the relationship is nonlinear. Specifically, we find that the ability of managerial equity ownership to reduce agency costs decreases as levels of ownership increase. Further, our results suggest that, above a certain level in some industries, managerial equity ownership marginally encourages efficient asset utilization but does not significantly deter excessive spending.