Why Managers Hold Shares of Their Firms: An Empirical Analysis



This supports the idea that managerial ownership is more important for ab-
normal returns in firms where CEOs matter more than in firms where CEOs
have little managerial discretion.

It is possible that our results are driven by abnormal returns of firms
with these very characteristics or from the very industries for which CEOs
seem to matter most. As argued above, these characteristics possibly reflect
a systematic risk factor that we do not control for yet. This could be the case
if managerial ownership would be particularly high for such firms in which
CEOs matter most, which is not unlikely: CEOs are probably more keen to
invest in their firms if they think they can increase firm value. To examine
this possibility, we also compute the abnormal returns of firms where we
believe CEOs to have a large impact, but where we do not observe managerial
ownership of CEOs at the same time. These results are presented in the
last column of Table 6. In all cases, we find no abnormal returns of these
portfolios. This shows that the power of CEOs to impact firm value leads
to abnormal returns only in combination with managerial ownership. This
also suggests that it is unlikely that our results are driven by an additional
systematic risk factor, as that factor would then have to be unrelated to the
characteristics of firms with high CEO discretion.

Overall, the above discussion shows that the abnormal returns we doc-
ument are most likely due to one of two remaining potential explanations:
they are either a sign of market inefficiencies, or they are explained by recent
theories where abnormal returns emerge in equilibrium as a compensation
for managerial effort. While the latter explanation is assuming a possibly un-
realistically high level of investor rationality, the first explanation assumes
quite limited rationality in the sense that investors do not learn about prof-
itable trading opportunities. At this stage, we are not able to decide which

27



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