Managerial Ability and Firm Market Value: Moderating Role of Managerial Incentives

Abstract

Examining the relationship between managerial ability and firm performance and investigating

the moderating effect of managerial incentives in the relationship between managerial ability and firm performance in an undeveloped market is the goal of this study. This research uses a sample of 261 non-financial companies listed on the Pakistan Stock Exchange (PSX) from 2013 to 2022. The study employs various regression techniques, including pooled ordinary least squares, fixed effects, and two-step system generalized method of moments. The propensity score matching approach is used to handle endogeneity concerns. The study's findings indicate that managerial ability enhances firm performance in terms of Tobin Q, and managerial incentives strengthen this relationship. Furthermore, alternative definition of firm performance provides robust findings. This research represents the initial effort to examine the moderating role of managerial incentives in the association between managerial ability and firm performance. Compiling the knowledge about managerial ability and managerial incentives from this study give a better idea to researchers to find out the direction and potential avenues for future studies.