Why Managers Hold Shares of Their Firms: An Empirical Analysis

widely accepted in the more recent economics and finance literatures
(see, e.g., Bertrand and Schoar (2003)). Hence, interpreting CEOs as
value increasing large shareholders is in line with findings of previous
empirical studies.

If the abnormal returns we find are really due to value increasing CEOs,
we should find a stronger effect in such firms where CEOs have more dis-
cretionary power to influence firm policies and eventually firm performance.
The effect should be stronger irrespective of whether it is explained by mar-
ket inefficiency or by compensation for effort in a rational equilibrium. We
will now take a closer look at this issue.

5 The Role of Managerial Discretion

It is likely that managerial discretion varies across industries and across
firms depending on firm characteristics. The literature provides some
guidance where to expect larger CEO effects. Several studies try to
identify specific industries in which CEOs seem to matter most for firm
value and operational performance (see, e.g., Hambrick and Abrahamson
(1995) and Wasserman, Nohria, and Anand (2001)). We expect managerial
ownership portfolios to outperform most in these industries. Johnson,
Magee, Nagarajan, and Newman (1985) find that executives are relatively
more important in firms with strong past sales growth, while Benned-
sen, Perez-Gonzalez, and Wolfenzon (2007) find a positive impact of a
CEO’s tenure on her power within the firm. Finally, it is also reasonable
to assume that CEOs have more discretion in younger firms than in
very old firms with long-standing and eventually rigid organizational
cultures. Consequently, we expect greater outperformance also among firms

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