The relationship between firm reputation and managerial entrenchment

• Published date: 01 May 2022
• Author: Morteza Zakerean,Habibollah Nakhaei,Godratollah Talebnia
• Date: 01 May 2022
• DOI: http://doi.org/10.1002/pa.2376

ACADEMIC PAPER

The relationship between firm reputation and managerial

entrenchment

Morteza Zakerean

1

| Habibollah Nakhaei

1

| Godratollah Talebnia

2

1

Department of Economics and Administrative

Sciences, Birjand Branch, Islamic Azad

University, Birjand, Iran

2

Department of Economics and Administrative

Sciences, Tehran Science and Research

Branch, Islamic Azad University, Tehran, Iran

Correspondence

Habibollah Nakhaei, Department of Economics

and Administrative Sciences, Birjand Branch,

Islamic Azad University, Birjand, Iran.

Email: nakhahabibollah@gmail.com

The present study is concerned about the relationship between firm reputation and

managerial entrenchment in listed firms on the Tehran Stock Exchange. In other

words, this paper attempts to figure out whether a firm reputation contributes to

managerial entrenchment. The multivariate regression model is used for this study.

Research hypotheses also examined using a sample of 768 listed observations on the

Tehran Stock Exchange during 2012–2017 and by using the multivariate regression

model based on panel data technique and fixed effects model. The obtained results

show a positive and significant relationship between firm reputation and managerial

entrenchment, such that an increase in firm reputation during the time has led to an

increased managerial entrenchment. Moreover, the present paper figures out that

firm reputation would also lead to narcissism and overconfidence of managers. This

paper utilized the exploratory factor analysis for measuring managerial entrenchment

and firm reputation, which is a modern method for calculating these two indices. Six

indices of board compensation, CEO tenure, CEO duality, reverse distributed earn-

ings, and excessive investment was used for managerial entrenchment. Further, for

measuring CEO narcissism by using the exploratory factor analysis, two indices of

CEO signature magnitude and cash compensation were converted to a single index

of CEO narcissism for the first time which is used for calculating narcissism. This

paper is the first study on this topic in the emerging markets, so it provides the users,

analysts, and legal institutions with useful information about intrinsic and acquired

features of management that contribute significantly to the comparability of financial

statements.

1|INTRODUCTION

One of the topics that gained special attention during recent decades

is managerial entrenchment. This phenomenon causes the distrust of

investors and creditors to managers which in turn would lead to suspi-

cion of others to the topic of investment. According to the agency

theory, when a manager is not the owner, a conflict of interests will

be shaped between owner and agent and a gap will be created

between the two where the agent gives priority to his interests. In

other words, the lower the percentage of manager ownership in the

firm, the less is the amount of loyalty of the manager. Along with the

growth of the firms, the share of managers would be in the minority

and the lower the proportion of this share, the higher the agency the-

ory would be because the conflict of interest would be higher. In

other words, managerial entrenchment occurs when managers, to gain

more power, manage to reach their benefits by utilizing the firm inter-

ests. The increase or decrease of a management share causes the

managers to pay less attention to shareholders’interests.

The manager lowers the percentage of profit distribution to main-

tain his/her position on the board, and this causes the short-term

shareholders to become less motivated and unwilling to invest in the

Stock Exchange, so it becomes inactive. Shared ownership is a vital

tool for managerial entrenchment when the manager discloses

inflated capital using dummy tools and publishes new shares.

Received: 21 July 2020 Revised: 5 August 2020 Accepted: 10 August 2020

DOI: 10.1002/pa.2376

J Public Affairs. 2022;22:e2376. wileyonlinelibrary.com/journal/pa © 2020 John Wiley & Sons Ltd 1of9

https://doi.org/10.1002/pa.2376