Consequences of CEOs’ Decisions to Hold Their Own Firm’s Stock

摘要

CEOs commonly hold large amounts of unconstrained stock in their own firm, i.e., vested shares in addition to any shares required by the firm’s stock ownership requirements or regulatory rules. This dissertation examines the consequences of the CEO owning and holding these additional shares. I begin with a theoretical model of why CEOs hold additional shares in their own firm when doing so is riskier than holding a more diversified portfolio. I establish conditions under which only a mixed-strategy equilibrium is feasible in which the CEO randomizes between holding and selling his additional shares. My model predicts that CEOs who own more unconstrained stock will be more likely to hold their additional shares and that this larger stake in the firm will lead to better future performance by the firm. udThese empirical predictions are supported by tests using data on CEO equity holdings in S&P 1500 firms between 1992 and 2014. Specifically, I find that the incentives provided by unconstrained stock are negatively associated with the CEO’s stock selling activity and positively associated with firm performance in each of the subsequent three years. Additional results provide evidence consistent with the CEO’s unconstrained stock influencing future firm performance through the CEO’s choice of productive effort. My results concerning the positive association between unconstrained stock ownership and subsequent firm performance are also robust to the alternative explanation of the CEO’s information advantage over investors and an alternative measure of unconstrained stock that incorporates the firm’s ownership policies.udOverall, this dissertation highlights the importance of the CEO’s unconstrained stock ownership and provides new insight concerning how CEOs’ stock ownership influences their own firm’s performance.