Voluntary and Mandatory Skin in the Game: Understanding Outside Directors’ Stock Holdings

32 Pages Posted: 31 Mar 2011

See all articles by Sanjai Bhagat

Sanjai Bhagat

University of Colorado at Boulder - Department of Finance

Heather Tookes

Yale University - Yale School of Management; Yale University - International Center for Finance

Date Written: March 29, 2011

Abstract

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 management.

Keywords: director stockholdings, equity ownership requirements, corporate governance, ownership and performance

JEL Classification: G30, G34

Suggested Citation

Bhagat, Sanjai and Tookes, Heather, Voluntary and Mandatory Skin in the Game: Understanding Outside Directors’ Stock Holdings (March 29, 2011). Available at SSRN: https://ssrn.com/abstract=1798784 or http://dx.doi.org/10.2139/ssrn.1798784

Sanjai Bhagat (Contact Author)

University of Colorado at Boulder - Department of Finance ( email )

Campus Box 419
Boulder, CO 80309
United States
303-492-7821 (Phone)

Heather Tookes

Yale University - Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Yale University - International Center for Finance ( email )

Box 208200
New Haven, CT 06520
United States

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