Executive Stock Ownership and Performance: Tracking Faint Traces

Abstract

We examine the relation between managers' financial interests and firm performance. Since the relation could go in either direction, we cast the analysis in a simultaneous-equations framework. For firms involved in acquisitions, we find that acquisition performance and Tobin's Q ratios affect the size of managers' stockholdings. We find no evidence, however, that larger managerial stockholdings lead to better performance. One possible reason is that managers with an equity stake in the firm may have the incentives but not the decision authority to affect performance. Alternatively, management is effectively disciplined by competition in product and labor markets. And finally, it may not be necessary for top executives to own stock to be residual claimants.