Effect of Executives’ Shareholding Ratio on Corporate Scandal Prevention(in Japanese)

This study was conducted to ascertain whether the shareholding ratio of corporate managers has a significant effect on illegal acts committed by the management, whether granting stock options to the current management can be substantially effective in preventing misconduct, and whether having the board of directors hold the company’s shares can serve a monitoring function for management wrongdoing. Past empirical studies of the relation between corporate performance and executives’ shareholding ratios, however, has failed to address illegal acts committed by management in relation to stock price recovery and the management’s shareholding ratio. They have also been unable to explain differences in managers’ behavior according to their shareholding ratio and the adoption of stock options. This study has therefore analyzed the relation of stock options and executives’ shareholding ratios with the incentives of executives to engage in illicit activities, i.e., the issue of a trade-off between the shareholder composition that prevents illegal acts and inducement to management misdeeds for the personal benefit of the managers. More specifically, the study conducted an empirical analysis of companies that have experienced scandals in the past to ascertain whether the managers’ shareholding ratios and availability of stock options significantly affected the misconduct of the management and whether boards of directors having a high shareholding ratio were able to control the torts of their corporate managers. The results of these analyses suggest that large shareholders accept the misconduct of their corporate managers if it enhances corporate performance. Their incentives to prevent such management behavior are therefore low (the hypothesis of repeated illegal acts). Results also show that, although the higher the shareholding ratio of managers becomes, the more illegal acts can be controlled, it remains unclear whether granting stock options would prevent unlawful activities: it might encourage such behavior.