as the Jegadeesh and Titman (1993) momentum factor. These findings are
robust to several specifications. We also find similar evidence in a stock-level
multivariate analysis that takes into account other firm-specific characteris-
tics that might drive returns. Our findings help to explain why CEOs invest
in their own firms.
The question why CEOs are invested in their own firms has been dis-
cussed elsewhere in the literature, and several other answers are suggested.
One prominent explanation is based on asymmetric information. Insiders
of firms are often better informed as far as firm value is concerned than
other investors. Hence, it may be in the interest of the CEO to trade in
her firm’s stock if she has access to private information. For example, ev-
idence in Lakonishok and Lee (2001) and Lin and Howe (1990) suggests
that insider transactions are profitable. However, our trading strategy does
not make use of any private information. Our strategy uses public informa-
tion concerning ownership, and this ownership information should be priced.
Possibly the most prominent explanation for managerial ownership is based
on the idea of private benefits of control (see, e.g., Jensen and Meckling
(1976), Grossman and Hart (1980), Jensen (1986), and Morck, Shleifer, and
Vishny (1988)). If a CEO owns a significant fraction of her firm’s shares, she
can become entrenched and eventually consume private benefits of control.
Thus, it may be in her self interest to invest in her firm. Following this ar-
gument, firm value should decrease if a CEO is substantially invested in a
firm. Finally, Malmendier and Tate (2005) show that CEOs are often prone
to overconfidence. If they are overconfident with respect to their own ability
to increase firm value, they may heavily invest in their own firms. However,
overconfident CEOs also undertake too risky or even negative NPV projects.
This reduces firm value. The private benefits of control argument as well as