Why Managers Hold Shares of Their Firms: An Empirical Analysis

4.3 Systematic Risk Factors

Traditional asset pricing theory argues that abnormal returns must be
a compensation for bearing some additional risk. While we control for
the standard systematic risk factors identified in the empirical literature,
there might be some additional risk of investing in firms with high CEO
ownership. By definition, the fate of a firm in which the CEO matters a
lot depends on the personality of the CEO. There is some risk related to
this, e.g., in the case of a sudden CEO death. However, to the extent that
such events like CEO deaths are probably not strongly correlated across
firms, this risk is idiosyncratic. Since our portfolios are large (depending
on the thresholds, more than 100 or 200 firms), idiosyncratic risk is not
crucial and only systematic risk factors should matter. Of course, it is still
possible that other systematic risk factors drive our results. To offer an
explanation for the abnormal returns we document, such factors would
have to be highly correlated with the very characteristics firms with high
CEO ownership have (and that we do not control for yet). While this
is, of course, possible, we are not aware of a likely candidate for such a factor.

4.4 Market Inefficiency

The abnormal returns may be a sign of a market inefficiency. Market par-
ticipants might not be aware of the positive effect of managerial ownership
on stock returns. Our results are based on a long term investment strategy.
This would imply that the market is not only inefficient in the short run,
but also that the market does not learn from the mistakes it once made.
We do not know any prior studies that investigate returns of firms with

21

<<   21   22   23   24   25   26   27   >>

More intriguing information