Why Managers Hold Shares of Their Firms: An Empirical Analysis

the overconfidence argument should lead to lower firm value. However, these
arguments do not imply that this effect cannot be priced: the value decreas-
ing effect of the CEO should be anticipated, the shares should be priced
at a discount, and the long term abnormal returns for these firms should
eventually be zero. Even if this effect would not be anticipated by market
participants, it would lead to negative rather than positive abnormal re-
turns. All alternative explanations for high managerial ownership discussed
above are not consistent with higher returns of owner CEO firms.

While our results may help to understand why managers invest in their
own firms, it is far more puzzling to understand why the market does not
(or cannot) price the existence of an owner manager. The share of stocks
owned by top executives is public information and easily observable for mar-
ket participants. So, why is this information not immediately priced? There
are three main potential explanations for this finding. First, the abnormal
returns we document might be a compensation for a high loading of manage-
rial ownership firms on a systematic risk factor that is yet unknown. Second,
the market may be inefficient and not able to correctly interpret managerial
ownership information. Third, recent theoretical models of the stock market
that depart from Walrasian equilibrium concepts can also explain such ab-
normal returns. In traditional models that examine Walrasian equilibria, it is
assumed that the stock market is perfectly competitive. In these models the
existence of an owner manager would be priced (see, e.g., Admati, Pfleiderer,
and Zechner (1994), and more recently DeMarzo and Urosevic (2006)). Von
Lilienfeld-Toal (2006) and Blonski and von Lilienfeld-Toal (2006) give up
the assumption of perfectly competitive stock markets and model strategic
interactions between non-atomistic investors in a game-theoretic setting.²

²Recent figures from the Conference Board show that up to 70% of all U.S. equities are

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