Taking Stock: Does Equity-Based Compensation Increase Managers' Ownership?

New York University, Center for Law and Business, Working Paper No. 98-014

28 Pages Posted: 28 Jul 1997

See all articles by Eli Ofek

Eli Ofek

New York University (NYU) - Department of Finance

David Yermack

New York University (NYU) - Stern School of Business

Date Written: November 1997

Abstract

We find that executives sell shares of previously owned stock after receiving equity-based incentive compensation, counteracting boards' attempts to tie their wealth to firm value. Executives sell stock during years in which they receive new stock options or restricted stock, and some evidence indicates further selling over time if options move into-the-money. When options are exercised, managers sell a large majority of shares acquired. Effects are strongest for executives who already hold many shares, while stock-based compensation does appear to increase the holdings of managers with low ownership. Although valuation theorists who study executive compensation frequently assume that executives cannot hedge the risks of stock-based pay, our research provides evidence to the contrary.

JEL Classification: G32, G34

Suggested Citation

Ofek, Eli and Yermack, David, Taking Stock: Does Equity-Based Compensation Increase Managers' Ownership? (November 1997). New York University, Center for Law and Business, Working Paper No. 98-014. Available at SSRN: https://ssrn.com/abstract=8441 or http://dx.doi.org/10.2139/ssrn.8441

Eli Ofek (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

David Yermack

New York University (NYU) - Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY 10012-1126
United States
212-998-0357 (Phone)
212-995-4220 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~dyermack

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