Too Risky To Hold? The Effect of Downside Risk, Accumulated Equity Wealth, And Firm Performance on CEO Equity Reduction

Elie Matta () and Jean Mcguire
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Elie Matta: GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique
Jean Mcguire: E.J Ourso College of Business - LSU - Louisiana State University [BatonRouge]

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Abstract: Although the alignment effect of equity ownership is often studied with emphasis on changes in firm strategy, the exposure of CEOs' firm-specific wealth to firm risk is more easily controlled by changing their level of equity holdings than by changing firm strategic risk. We rely on prospect theory and the behavioral theory of the firm to examine the antecedents of CEO equity reduction and investigate whether it serves to decouple CEO wealth from firm risk. Given its central role in loss avoidance, we underline the effect of the firm's downside risk and distinguish the total loss potential on equity holdings from the loss potential due to firm-specific factors. Allowing for own-performance referents, we also consider firm performance and the value of a CEO's equity holdings in the analysis. Based on a sample of 208 U.S. CEOs for the years 1997–1999, we find empirical support for the role of downside risk and firm performance in CEO equity reductions. Implications on incentive alignment through equity ownership are presented.

Keywords: agency theory; prospect theory; behavioral theory of the firm; equity ownership; downside risk; CEO (search for similar items in EconPapers)
Date: 2008-07-01
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Published in Organization Science, 2008, Vol.19, n°4, pp.567-580. ⟨10.1287/orsc.1070.0334⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-00486650

DOI: 10.1287/orsc.1070.0334

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