Adoption of Executive Ownership Guidelines: A New Look
52 Pages Posted: 30 Apr 2010 Last revised: 19 Mar 2011
Date Written: September 2, 2010
Executive ownership guidelines are corporate polices mandating executive stock ownership in the firm. We document a dramatic increase in the adoption of executive ownership guidelines among large US firms in recent years. While early (pre-2002) adoptions appear to be driven primarily by efficient contracting between managers and shareholders, recent (post-2002) adoptions appear to be driven mainly by public pressure and firms’ herding tendency. As a result, significant post-adoption improvements in stock performance and increases in long-term investment are observed among early adopters but not among recent adopters except for a subset that is likely to have made the adoptions for efficient contracting reasons. In addition, some recent adopters exhibit abnormal increase in equity compensation that early adopters do not. These findings suggest that blind adoption of a “best practice” in corporate governance does not necessarily benefit shareholders.
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