Institutional Ownership and CEO Equity Incentives

Abstract

This study provides new evidence on the relation between institutional ownership and the equity incentives provided to CEOs by their portfolio holdings of stock and stock options. We show that when firms’ CEOs have abnormally high equity incentives, higher institutional ownership is associated with a larger reduction in the incentives. Conversely, when firms’ CEOs have abnormally low equity incentives, higher institutional ownership is associated with a larger increase in these incentives. To achieve this, we find that firms with higher institutional ownership that have abnormally high (low) incentives experience a greater reduction (increase) in CEO annual option grants and a substitution between CEO equity-based compensation and cash-based compensation. Our findings highlight the important role of institutional investors in enhancing efficiency in top executives’ compensation contracting process.

Keywords: CEO Equity Incentives, Executive Compensation, Institutional Monitoring, Firm Performance

JEL Classification: G30, G34, J33, L25, M41