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Do Executives Hold on to Equity-Linked Incentives? The Role of Minimum Shareholding Policies

36 Pages Posted: 15 Jul 2012 Last revised: 14 Aug 2015

Piotr Korczak

University of Bristol - Department of Finance and Accounting

Xicheng Liu

University of Bristol - School of Economics, Finance and Management

Date Written: July 31, 2013

Abstract

Previous literature documents that executives tend to cash out equity incentives when equity-linked compensation vests. Such a behavior destroys long-term incentives and hence is costly to outside shareholders. It is recommended that the unloading of incentives can be limited when the firm adopts a minimum executive shareholding policy. In this paper we provide the first evidence on the effectiveness of such policies. We find that the policies have a very limited effect on managerial behavior. They do not encourage larger retention of shares acquired from exercised options and from vested performance shares but somewhat increase share accumulation through other channels, for example open market purchases. We identify factors in the design and enforcement of the policies that improve their effectiveness. We also show that the lack of compliance with the policy has potentially important economic implications in the form of weaker firm performance and lower valuations. Our results have implications for the debate on executive remuneration regulations and practices.

Keywords: Equity-linked pay, rebalancing, minimum shareholding policies

JEL Classification: G32, M52

Suggested Citation

Korczak, Piotr and Liu, Xicheng, Do Executives Hold on to Equity-Linked Incentives? The Role of Minimum Shareholding Policies (July 31, 2013). Available at SSRN: https://ssrn.com/abstract=2105647 or http://dx.doi.org/10.2139/ssrn.2105647

Piotr Korczak (Contact Author)

University of Bristol - Department of Finance and Accounting ( email )

8 Woodland Road
Bristol BS8 1TN
United Kingdom
+44 117 9288407 (Phone)
+44 117 9288577 (Fax)

HOME PAGE: http://www.efm.bris.ac.uk/ecxpk/

Xicheng Liu

University of Bristol - School of Economics, Finance and Management ( email )

United Kingdom

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