Why are firms with more managerial ownership worth less?

An interesting, if somewhat counterintuitive, question. One could expect that a firm with more managerial ownership would be worth more since the incentives of the managers will be better aligned with those of the owners.

Why are Firms with More Managerial Ownership Worth Less?
Kornelia Fabisik, Rüdiger Fahlenbrach, René M. Stulz, Jérôme P. Taillard

NBER Working Paper No. 25352
Issued in December 2018
NBER Program(s):Corporate Finance

Using more than 50,000 firm-years from 1988 to 2015, we show that the empirical relation between a firm’s Tobin’s q and managerial ownership is systematically negative. When we restrict our sample to larger firms as in the prior literature, our findings are consistent with the literature, showing that there is an increasing and concave relation between q and managerial ownership. We show that these seemingly contradictory results are explained by cumulative past performance and liquidity. Better performing firms have more liquid equity, which enables insiders to more easily sell shares after the IPO, and they also have a higher Tobin’s q.