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Required CEO stock ownership: Consequences for risk-taking and compensation

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  • Brisley, Neil
  • Cai, Jay
  • Nguyen, Tu

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.

Suggested Citation

  • Brisley, Neil & Cai, Jay & Nguyen, Tu, 2021. "Required CEO stock ownership: Consequences for risk-taking and compensation," Journal of Corporate Finance, Elsevier, vol. 66(C).
    • Handle: RePEc:eee:corfin:v:66:y:2021:i:c:s0929119920302947
    DOI: 10.1016/j.jcorpfin.2020.101850
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    Cited by:

    1. Natalya Zelenyuk & Robert Faff, 2022. "Effects of incentive pay on systemic risk: evidence from CEO compensation and CoVar," Empirical Economics, Springer, vol. 63(6), pages 3289-3311, December.
    2. Zhaozhen Zhu & Yijia Guo & Zhao Jiang & Xiaojun Chen, 2023. "The Perspective of Long-Term and Short-Term Incentives on the Business Environment, Executive Incentive Contracts, and Enterprise Innovation," SAGE Open, , vol. 13(4), pages 21582440231, November.

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    More about this item

    Keywords

    Stock ownership requirement; Managerial diversification; Risk-taking; Executive compensation;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation

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