Why Managers Hold Shares of Their Firms: An Empirical Analysis

high managerial ownership. Thus, investors might indeed not be aware of
this effect. Given that information on managerial ownership was easily
available to investors during our sample period and the abnormal returns
we document are quite substantial, this is surprising.

4.5 Compensation for Effort

It is also possible that the abnormal returns are a remuneration for effort
costs of CEOs. Blonski and von Lilienfeld-Toal (2006) and von Lilienfeld-
Toal (2006) depart from the traditional Walrasian equilibrium concept em-
ployed in earlier studies, e.g., Admati, Pfleiderer, and Zechner (1994) and
DeMarzo and Urosevic (2006). They discuss the implications of a large and
value increasing shareholder for asset pricing. The novel idea in these pa-
pers is that the existence of a value increasing CEO who is at the same
time a large shareholder is not fully priced in equilibrium. The basic intu-
ition driving this effect is as follows: by exerting value increasing effort, the
owner manager produces a kind of public good for all other investors in this
firm. While all outside investors profit from the value increasing activity the
owner manager may undertake, it is the owner manager alone who has to
bear the (private) effort costs. Moreover, owner managers typically bear ad-
ditional private costs due to holding an undiversified portfolio. As a result,
the owner manager has strong incentives to sell shares whenever the share
price anticipates the equilibrium level of her value increasing effort. In this
case, selling the shares would be optimal for the manager: she can benefit
from the increased stock price—which would then already reflect her future
value-increasing effort—without having to bear the costs of exerting this

22

<<   22   23   24   25   26   27   28   >>

More intriguing information