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Managerial shareholding policies and retention of vested equity incentives |
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| Institution: | 1. Wuhan University of Technology, School of Economics, Wuhan, China;2. The University of Adelaide, Adelaide Business School, 10 Pulteney Street, Adelaide, South Australia, 5000, Australia;3. University of International Business and Economics, School of Business, Beijing, China;4. The University of Adelaide, Adelaide Business School, Australia;1. Smith School of Business, Queen’s University, 143 Union Street West, Kingston ON K7L 2P3, Canada;2. HEC Montréal, 3000 Chemin de la Côte-Sainte-Catherine, Montréal QC H3T 2A7, Canada;3. London Business School, Regent’s Park, London NW1 4SA, UK;4. Centre for Economic Policy Research, London EC1V 0DX, UK;5. European Corporate Governance Institute, Rue Ducale 1, Bruxelles 1000, Belgium;6. Olin Business School, Washington University, Campus Box 1133, One Brookings Drive, St. Louis, MO 63130, USA |
| 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. |
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