Why Managers Hold Shares of Their Firms: An Empirical Analysis

3.2.5 Equal-Weighted Returns

Our results presented so far are based on value-weighted portfolios. Thus,
it is possible that they are driven by a small number of large firms. To
examine this possibility, we also investigate the returns of equal-weighted
managerial ownership portfolios. Results are presented in Panel E. We find
similar, albeit somewhat weaker, effects than for value-weighted portfolios.
The abnormal returns we document are still economically and statistically
significant. Consequently, the abnormal returns of high managerial owner-
ship portfolios shown above are not solely driven by a few firms with a very
high market capitalization.

3.2.6 No Rebalancing

Our results are based on a strategy that requires annual rebalancing of
the portfolio. Naturally, this causes some trading costs. However, S&P 1500
stocks are usually quite liquid (and S&P 500 stocks even more so). This sug-
gests that the profits documented above do not vanish when taking trading
costs into account. Nevertheless, as an alternative approach, we also exam-
ine the returns of a completely passive buy and hold strategy. We consider
a portfolio that buys into all 1996 firms with an owner manager who owns
more than 10% without any additional readjustments in the following years.
The monthly (annual) abnormal return of this portfolio amounts to approx-
imately 0.91% (11.44%) and 0.44% (5.35%). Significance drops to the 5%
level (Panel F). Similar results are obtained for the 5% cutoff for managerial
ownership. This shows that even a simple low-cost buy and hold strategy
based on managerial ownership in 1996 would have earned abnormal returns
that are significant in statistical as well as in economic terms.

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