I. INTRODUCTION

It has long been believed that many of the problems associated with the modern corporation arise from the separation of the ownership from the control of the corporation. ^[1] This separation, and the conflicting incentives of owners (value maximization) and managers (utility maximization) has been termed the agency problem, with the resulting costs called agency costs. Consequently, many have argued (e.g., Jensen and Meckling 1976) that increasing managerial ownership will reduce those problems by aligning the interests of management and shareholders.

Consider the following example. The CEO of a major corporation is considering the purchase of a corporate jet for $10 million. Although the corporation does not need the jet, the CEO wants it for the status it conveys. If the CEO owns 1% of the corporation, his or her wealth will decrease by $100,000 as a result of the purchase. Consequently, as long as the value placed on the jet by the CEO exceeds $100,000, he or she will have the corporation purchase the jet. However, if the CEO owns 10% of the corporation, his or her wealth would decrease by $1 million as a result of the purchase. Obviously, it is less likely he or she will value the jet at $1 million, and hence the corporation is less likely to purchase the jet. In generic terms, as CEO ownership increases, he or she bears more of the costs of his or her...