Why Managers Hold Shares of Their Firms: An Empirical Analysis

pronounced for S&P 500 firms than for S&P 1500 firms. This suggests that
the abnormal returns are not (only) caused by illiquidity or liquidity risk,
because the stocks in the S&P 1500 are clearly smaller than those in the
S&P 500.¹⁶ Furthermore, in our multivariate analysis we control for firm
size and trading volume which can be interpreted as proxies for liquidity.
While it would be preferable to add more elaborate proxies for liquidity
and liquidity risk as control variables in our multivariate examinations,
lack of data availability refrains us from doing so. However, the level of
the abnormal returns we document seems to be too high to be explained
by a renumeration for liquidity or liquidity risk, especially in the case of
S&P 500 stocks, which are generally assumed to be some of the most liquid
stocks available.

4.2 Limits to Arbitrage

It is possible that market participants are aware of the abnormal returns
we document but cannot profit from this anomaly due to limits of arbitrage
(Shleifer and Vishny (1997)). In that case, the anomaly can persist although
market participants are aware of its existence. However, this is not likely to
explain our findings, as it is not even necessary to short sell stocks in order
to profit from the abnormal returns offered by firms with high managerial
ownership (see Section 3.2.1).

¹⁶We also examine abnormal returns across size quintiles. Results (not supported) show
no clear influence of firm size on the extent of abnormal returns generated by managerial
ownership portfolios.

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