Ever wondered why CEOs love to hold a large chunk of equity of the companies that they run? Researchers Christopher S Armstrong, John E Core, Wayne R Guay observe that CEOs tend to hold more equity when they are more risk-tolerant and enjoy more power. There is little evidence to show that it is over-confidence or inside trading that is the reason for their huge holding. In fact, the study states that CEOs hold more equity than one would expect given the magnitude of the risk premium in their pay. The average CEO receives a pay premium for holding a substantial portion of this equity, suggesting that what might at first appear to be unconstrained equity, may in fact, be implicitly required by the board for incentive contacting purposes.
Title: Why Do CEOs Hold So Much Unconstrained Equity?
Source: Social Science Research Network