Managerial Shareholding Policies and Retention of Vested Equity Incentives

34 Pages Posted: 5 Nov 2013

See all articles by Piotr Korczak

Piotr Korczak

University of Bristol - Department of Finance and Accounting

Xicheng Liu

University of Bristol - School of Economics, Finance and Management

Date Written: October 1, 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. We provide the first evidence of the effectiveness of such policies in that respect. Using data for UK FTSE 350 companies we show that executives whose ownership is below the minimum set by the policy retain more newly vesting equity and the incentives to retain shares weaken when the holdings are above the minimum. We also document economic implications of compliance with the policy and we find higher firm valuations when actual ownership increases relative to the minimum holdings required. Our results have implications for the debate on executive remuneration regulations and practices.

Keywords: Equity-linked pay, cashing out, shareholding policies

JEL Classification: G32, M52

Suggested Citation

Korczak, Piotr and Liu, Xicheng, Managerial Shareholding Policies and Retention of Vested Equity Incentives (October 1, 2013). Journal of Empirical Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2349581

Piotr Korczak (Contact Author)

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

8 Woodland Road
Bristol BS8 1TN
United Kingdom
+44 117 394 1491 (Phone)

HOME PAGE: http://sites.google.com/view/piotrkorczak/home

Xicheng Liu

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

United Kingdom

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