More than just agents: the role of executives' psychological ownership in aligning interests of principals and agents

Publication Date

1-26-2023

Document Type

Article

Publication Title

Managerial Finance

Volume

49

Issue

2

DOI

10.1108/MF-09-2021-0437

First Page

338

Last Page

356

Abstract

Purpose: Aligning interests of principals and agents is the most efficient way to reduce the agency conflict. Yet, the literature on executive compensation reveals inefficiencies in providing executives with legal ownership. Thus, the authors go beyond legal ownership and posit that executives' psychological ownership further aligns the interests of executives as agents and shareholders as principals. Design/methodology/approach: The authors employ sophisticated methodology, including dynamic panel data regressions, static panel data regressions and propensity score matching. External validity is achieved through the large-scale sample of 22,179 firm-quarters spanning 24 quarters from 2013 to 2018 of the S&P 1500. Findings: Psychological ownership aligns the interests of executives and shareholders since this mindset makes executives perceive the company as “theirs”. Executives' psychological ownership decreases firms' fraud and financial performance. The decrease in financial performance is related to an observed increase in executives' risk-aversion. Investors recognize this ownership mindset in executives and reward it with a positive market reaction. Originality/value: The study is the first to consider psychological ownership of executives in relation to firm outcomes such as financial performance or fraud. The findings are of interest to scholars and practitioners, as this study establishes both theoretically and empirically a way to align the interests of principals and agents beyond executive compensation.

Keywords

Agency theory, Executive compensation, Financial performance, Fraud, Market reaction, Risk-aversion

Department

Accounting and Finance

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