Why Managers Hold Shares of Their Firms: An Empirical Analysis

1 Introduction

CEOs often own a significant fraction of the outstanding stocks of the firms
they work for. In 2000, 18% of the CEOs of S&P 1500 firms voluntarily
held 5% or more of their company’s stocks. These holdings of own company
stocks usually constitute a dominant fraction of the CEO’s personal wealth.
This pronounced voluntary portfolio concentration is puzzling, as it entails
costs in terms of foregone diversification (Lambert, Larcker, and Verrecchia
(1991) and Kahl, Liu, and Longstaff (2003)).

We offer a simple new explanation for this puzzle: Managers invest in
their own firms because it is a good (long term) investment for them. To test
this explanation, we empirically examine the following question: do stocks
of firms in which the CEO holds a large fraction of the firms’ outstanding
shares (owner CEOs) generate positive abnormal returns?

We analyze this question by examining the returns of S&P 500 and S&P
1500 firms for the periods 1994 to 2005 and 1996 to 2005, respectively. Our
paper departs from the literature in that it documents that portfolios con-
sisting of firms with owner CEOs significantly outperform the market.¹ For
example, a value-weighted portfolio consisting of all S&P 500 (S&P 1500)
firms in which the CEO holds more than 10% of the company’s stocks de-
livers abnormal returns of 13% p.a. (12% p.a.). This result holds after con-
trolling for the influence of the three Fama and French (1993) factors as well
¹ There are many studies that examine the impact of CEO ownership on firm value and
operational performance (see, e.g., Morck, Shleifer, and Vishny (1988), McConnell and
Servaes (1990), and Hermalin and Weisbach (1991)).

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