Voluntary and mandatory skin in the game: understanding outside directors' stock holdings

We examine the determinants of equity ownership by outside directors as well as the relationship between ownership and operating performance. Unlike previous studies of equity ownership by directors, we use hand-collected data on firm-level policies requiring director ownership for S&P 500 firms...

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Bibliographic Details
Published in:The European journal of finance 2012-04, Vol.18 (3-4), p.191-207
Main Authors: Bhagat, Sanjai, Tookes, Heather
Format: Article
Language:English
Subjects:
Board of directors
corporate governance
director stockholdings
Economic performance
equity ownership requirements
Equity stake
Financial performance
Investment analysis
Outside directors
Ownership
ownership and performance
Personal finance
Stockholders
Studies
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Summary:We examine the determinants of equity ownership by outside directors as well as the relationship between ownership and operating performance. Unlike previous studies of equity ownership by directors, we use hand-collected data on firm-level policies requiring director ownership for S&P 500 firms during the years 2003 and 2005. Ownership requirements allow us to shed further light on the determinants of director holdings and to separate voluntary from mandatory holdings of directors. If ownership requirements reflect optimal ownership levels (from the firm's perspective), they provide a useful identification tool in the examination of ownership-performance relationships. Our primary findings are that mandatory holdings are unrelated to future performance; this is consistent with the theory that ownership requirements reflect optimal ownership levels. By contrast, voluntary holdings are positively and significantly related to future performance, suggesting that they perform an incentivizing role for directors.
ISSN:1351-847X
1466-4364
DOI:10.1080/1351847X.2011.579739