The Theory And Empirical Study Of Managerial Ownership And Stock Market Return

The separation of management and ownership led to the agency problem. With the development of financial market, more and more companies are paying attention to managerial ownership to try to solve the agency problem. For quite a long time, the managerial ownershipis seen as a long-term incentive mechanism, and much literature focus on the relationship between managerial ownership and firm value or operating performance. Meanwhile, a number of firms’ managers voluntarily hold a relatively large fraction of their firm’s stock, which is known as "owner-CEOs." Obviously, this phenomenon is irrational according to the gold rule of diversification, which may indicate the potential relationship between managerial ownership and stock returns.We examine the relationship between managerial ownership and stock market performance from both theoretical and empirical perspective. In the aspect of theory, we analyze the relationship based on game theory and behavioral corporate finance.In the aspect of empirical research, a strategy based on public information about managerial ownership delivers annual abnormal returns of as large as 5%. The effect is strongest among firms with large managerial discretion. Furthermore, owner-managers are value increasing:they run their firms more efficiently. Overall, our findings indicate that the market does not correctly price the incentive effects of managerial ownership, suggesting feedback effects between corporate finance and asset pricing.