Why Managers Hold Shares of Their Firms: An Empirical Analysis

3.1 Portfolio Evidence

Table 3 reports the estimation results using portfolios with various cutoffs
for managerial ownership.

+ + + Please insert TABLE 3 about here + + +

In Panel A, the results for value-weighted portfolios of S&P 1500 firms
for various cutoffs of managerial ownership over the period 1996 to 2005
are presented. For a cutoff of 5%, we find a positive estimate for αi that is
statistically significant at the 5% level. We find economically significant ab-
normal monthly returns of 0.68%, which translates into an annual abnormal
return of 8.52%. This result is even stronger if we examine portfolios with
higher cutoffs for managerial ownership. It increases to abnormal returns of
12.1% p.a. for a cutoff of 10% and to over 16% for a cutoff of 15%.⁸ For
these higher cutoffs, abnormal returns are statistically significant at the 1%
level.

These results carry over to the S&P 500 firm universe, where we can
examine the longer period from 1994 to 2005 (Panel B). In this case, we
find abnormal returns of 9.73% p.a. for the 5% cutoff and abnormal returns
of 13.2% p.a. for the 10% cutoff. With the exception of the 15% cutoff, the
effect is always stronger than for the S&P 1500 firms in Panel A.

Overall, these results are highly significant in economic as well as statis-
tical terms. They suggest that one would have earned abnormal returns of
well above 10% p.a. by investing in firms with high managerial ownership
⁸We do not report results for higher cutoffs, as the number of firms that enter our
portfolio gets relatively small in these cases. For extremely high cutoffs, e.g., 25% or
higher, we are not able to find any statistically significant coefficients anymore.

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