Journal article
Required CEO stock ownership: Consequences for risk-taking and compensation
Journal of corporate finance (Amsterdam, Netherlands), v 66, 101850
Feb 2021
Abstract
In response to corporate governance concerns, SEC disclosure rules, and pressure from Institutional Shareholder Services, most large U.S. public firms have adopted executive stock ownership requirements (‘SORs’) in recent years. Compared to CEOs already in compliance, CEOs who have not yet fulfilled the requirement at adoption subsequently increase stockholdings, exposing themselves to more company-specific risk, potentially providing risk-reduction incentives and diminishing their subjective valuation of firm equity. We find that these CEOs on average subsequently reduce firm risk through diversifying M&A, less financial leverage, and smaller R&D investment. They experience a deterioration in firm performance and valuation, each associated with firms that do reduce risk, but receive significantly increased stock grants. Our evidence suggests that boards should exercise judgment when adopting this popular governance initiative.
•Stock Ownership Requirements are recently widely adopted by S&P500 firms.•At firms' adoption, one third of CEOs fall short of the required shareholding.•These CEOs subsequently receive increased stock grant compensation.•They then reduce firm risk: decrease leverage and R&D, increase diversifying M&A.•Their firms experience poorer performance and decreased market valuation.
Metrics
Details
- Title
- Required CEO stock ownership: Consequences for risk-taking and compensation
- Creators
- Neil Brisley - University of WaterlooJay Cai - Drexel UniversityTu Nguyen - University of Waterloo
- Publication Details
- Journal of corporate finance (Amsterdam, Netherlands), v 66, 101850
- Publisher
- Elsevier
- Resource Type
- Journal article
- Language
- English
- Academic Unit
- Finance
- Web of Science ID
- WOS:000642445000024
- Scopus ID
- 2-s2.0-85098106292
- Other Identifier
- 991020534940104721
InCites Highlights
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- Collaboration types
- Domestic collaboration
- International collaboration
- Web of Science research areas
- Business, Finance