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Does Equity-Based Compensation Increase Managers' Ownership?

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  • Eli Ofek
  • David Yermack

Abstract

We find that executives sell shares of previously owned stock after receiving equity-based incentive compensation, counteracting boards' attempts to tie their wealth to firm value. Executives sell stock during years in which they receive new stock options or restricted stock, and some evidence indicates further selling over time if options move into-the-money. When options are exercised, managers sell a large majority of shares acquired. Effects are strongest for executives who already hold many shares, while stock-based compensation does appear to increase the holdings of managers with low ownership. Although valuation theorists who study executive compensation frequently assume that executives cannot hedge the risks of stock-based pay, our research provides evidence to the contrary.

Suggested Citation

  • Eli Ofek & David Yermack, 1997. "Does Equity-Based Compensation Increase Managers' Ownership?," New York University, Leonard N. Stern School Finance Department Working Paper Seires 98-052, New York University, Leonard N. Stern School of Business-.
    • Handle: RePEc:fth:nystfi:98-052
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    Cited by:

    1. Rüdiger Fahlenbrach, 2009. "Shareholder Rights, Boards, and CEO Compensation," Review of Finance, European Finance Association, vol. 13(1), pages 81-113.
    2. Eli Talmor & James S. Wallace, 1998. "Computer Industry Executives: An Analysis of the New Barons' Compensation," Information Systems Research, INFORMS, vol. 9(4), pages 398-414, December.
    3. Clifford G. Holderness & Randall S. Kroszner & Dennis P. Sheehan, 1998. "Were the Good Old Days That Good? Changes in Managerial Stock Ownership Since the Great Depression," NBER Working Papers 6550, National Bureau of Economic Research, Inc.
    4. repec:eee:labchp:v:3:y:1999:i:pb:p:2485-2563 is not listed on IDEAS
    5. Guay, Wayne R., 1999. "The sensitivity of CEO wealth to equity risk: an analysis of the magnitude and determinants," Journal of Financial Economics, Elsevier, vol. 53(1), pages 43-71, July.

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