CEO discretionary power,unconstrained stock ownership,and stock trading: Theory and evidence |
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| Institution: | 1. Idaho State University, Department of Accounting, Pocatello, ID, United States of America;2. University of Cincinnati, Lindner College of Business, Department of Accounting, Cincinnati, OH, United States of America;3. University of San Diego, Knauss School of Business, Department of Accounting, San Diego, CA, United States of America;1. Ouachita Baptist University, Frank D. Hickingbotham School of Business, Arkadelphia, AR 71998, USA;2. University of Mississippi, E. H. Patterson School of Accountancy, University, MS 38677, USA;2. Kennesaw State University, United States of America;3. The University of Alabama, United States of America |
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| Abstract: | This paper examines CEOs' holding and trading of unconstrained firm stock they own, i.e., vested and sellable firm shares. I first develop a theoretical model of why CEOs hold sellable shares in their own firm when doing so is riskier than holding a more diversified portfolio. In this model, greater stock ownership allows the CEO to exercise discretionary power more easily and extract rents from the company. My model predicts that CEOs desire to hold more firm stock and therefore are less likely to sell stock when they have greater discretionary power. This empirical prediction is supported by tests that measure discretionary power based on the principal component analysis of three proxies. Using stock trading data in S&P 1500 firms, I find that discretionary power is negatively (positively) associated with the CEO's stock sale (purchase). The results are weaker in industries where rent extraction is more difficult. Further, results hold for both founder and non-founder CEOs, and are robust to a battery of sensitivity tests. Overall, this study provides new insights concerning CEOs' decisions to own their companies' stock. |
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