Why Managers Hold Shares of Their Firms: An Empirical Analysis

controlling for the influence of other firm characteristics. This confirms our
results from the portfolio strategies.

4 Discussion of Results and Potential Explana-
tions

Based on our empirical findings, we will now discuss several potential
explanations for the reported abnormal stock returns.

4.1 Liquidity and Liquidity Risk

Liquidity and liquidity risk are important factors determining asset prices.
Amihud and Mendelson (1986a) show theoretically, that illiquid stocks
should deliver higher returns. There is broad empirical evidence support-
ing this prediction (see, e.g., Amihud and Mendelson (1986b), Brennan
and Subrahmanyam (1996), and Brennan, Chordia, and Subrahmanyam
(1998)). Moreover, as shown by Pastor and Stambaugh (2003), not only the
level of liquidity but also systematic liquidity risk is priced. While the size
factor captures most of the effect of the level of liquidity on asset prices,
it is likely that the four-factor model used in this paper does not fully
capture the influence of liquidity risk. However, Pastor and Stambaugh
(2003) report that liquidity risk is more important for smaller firms. Thus,
if the abnormal returns documented above would be a remuneration for
low levels of liquidity or for liquidity risk, we would expect that abnormal
returns are more pronounced for the smaller firms in our samples. However,
the abnormal returns we find in the portfolio analysis are usually more

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