Why Managers Hold Shares of Their Firms: An Empirical Analysis

view about investor rationality is more appropriate and which explanation
eventually is most likely to explain our findings.

6 Conclusion

We examine the abnormal returns of portfolios constructed based on public
information about managerial ownership. We find that value-weighted port-
folios consisting of S&P 500 stocks in which the CEO holds more than 5% or
10% of the firm’s outstanding shares generate statistically and economically
significant abnormal returns of 9.7% p.a. and 13.2% p.a., respectively. For
S&P 1500 firms the effect is only slightly smaller, with abnormal returns of
8.5% p.a. and 12.1% p.a. for a 5% and 10% cutoff of managerial ownership,
respectively.

These abnormal returns are achieved after controlling for factors known
to drive asset returns like size, book-to-market, and momentum. Our results
are robust and also hold after controlling for further firm-specific character-
istics in a multivariate setting. The outperformance is most pronounced for
firms with high CEO discretion.

On the one hand, these findings provide a rationale for the puzzling
observation that CEOs often hold a large fraction of their own firms despite
the costs of the underdiversification of their personal portfolios this often
implies: they are compensated for this by abnormal positive returns earned
on their investments.

On the other hand, the results presented in this study give rise to a
new puzzle. Namely, why are abnormal returns of firms with high CEO
ownership persistent? We discuss several possible explanations for this. Po-
tentially, they are driven by an additional systematic risk factor that we do

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