Why Managers Hold Shares of Their Firms: An Empirical Analysis

In this case, equilibrium prices do not necessarily reflect expected value en-
hancing activities of owner managers (see also Gorton and He (2006)). If
they would reflect the future effort of a CEO in a perfectly liquid market,
this CEO could profit from the price increase right away by selling her stocks
even before carrying out the value increasing activity and bearing the effort
costs associated with this. Obviously, this cannot be a rational equilibrium.
However, there exist rational equilibria with CEO ownership in which stock
prices do not fully reflect future CEO effort, i.e., in which stocks should
earn positive abnormal returns. In this sense, managerial ownership and
abnormal returns are jointly and endogenously determined.

Irrespective of whether the market is inefficient in the sense of being
unaware of the value increasing effect of a CEO with high managerial own-
ership, or whether abnormal returns are a compensation for managerial ef-
fort in a rational equilibrium, one necessary assumption has to hold: CEOs
have to have some influence on firm policies and eventually performance.
Consequently, we expect abnormal returns to be higher among firms with
high managerial ownership and in which managerial discretion is high. We
do indeed find that the difference between returns of firms with and without
managerial ownership is mainly driven by firms in which managerial discre-
tion is high: abnormal returns of owner-CEO firms are most pronounced for
firms from industries that have been shown, e.g., in Wasserman, Nohria, and
Anand (2001), to be characterized by high managerial latitude of action, and
in young firms, high-growth firms, and firms in which CEO tenure is high.

The structure of this paper is as follows. In Section 2 we introduce the
data and detail our methodology. Section 3 presents our main results, while
now held by institutional investors, suggesting that the U.S. stock market is not atomistic
and that not all investors are price takers.

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