Review of Quantitative Finance and Accounting, 15 (2000): 169±185
# 2000 Kluwer Academic Publishers. Manufactured in The Netherlands.
Managerial Ownership and Accounting Disclosures:
An Empirical Study
DAVID S. GELB*
Stillman School of Business, Seton Hall University
Abstract. This study examines empirically the effect of managerial ownership on ®rms' disclosures. Agency
theory predicts that investors' information requirements increase with the agency costs of the ®rm. Managerial
ownership mitigates agency costs and therefore should reduce investors' information needs. This study tests the
hypothesis that ®rms with lower levels of managerial ownership provide more extensive disclosures by
examining analysts' ratings of ®rms' disclosures. In contrast to the proxies used in prior studies that test this
relationship, such as the earnings-return correlation and management earnings forecasts, these ratings provide a
more direct measure of ®rms' overall disclosure practices.
I ®nd that the relationship between managerial holdings and disclosures depends on the type of disclosure.
Consistent with the hypothesis of this study, ®rms with lower levels of managerial ownership are more likely to
receive higher ratings for the disclosures provided in their annual and quarterly reports, even after controlling for
size, performance, volatility of returns, the frequency of securities offerings and proprietary costs. The more
informal and ¯exible aspects of disclosures, however, as measured by the investor relations rating, are not
in¯uenced by the level of managerial ownership. These results are consistent with prior research that predicts that
®rms lower their costs of capital by signaling a commitment to maintain a more open disclosure policy. Because
annual and quarterly reports are less ¯exible, and therefore less likely to change, they may represent a more
credible commitment to provide more informative disclosures.
Key words: managerial ownership, voluntary disclosures, agency costs
JEL Classi®cation: G14, G20
This paper examines empirically the effect of managerial ownership on ®rms' disclosures.
Numerous studies have investigated the relationship between various ®rm attributes and
This study extends the existing literature by examining managerial
ownership, and its role in mitigating the agency costs of the ®rm, as a determinant of ®rms'
Principal-agent theory suggests a negative relationship between managerial ownership
and accounting disclosures. As the agency costs associated with the separation of
ownership and control increase, investors perceive a greater need to monitor the ®rm's
managers and will therefore demand more information from these ®rms. Firms with higher
*This paper is from my dissertation presented at the Stern School of Business, New York University. The title of
the dissertation is ``An Empirical Investigation into the Determinants of Firms' Disclosure Policies''.