Abstract
Using a new data set of small public firms in Germany, this paper analyzes the incentive and entrenchment effects associated with managerial equity ownership. The relationship between firm value and insider ownership is found to be nonlinear: at low levels of ownership firm value is positively related to managerial holdings, whereas the relation is negative for higher levels of ownership. Disentangling cash flow and voting rights of managing directors, firm value increases with cash flow ownership of top management but decreases with control, in particular with management voting rights in excess of 25%. Outside blockholders do not appear to play a role in disciplining managements. Codetermination does not affect the value of small firms.