CEO Ownership, Stock Market Performance, and Managerial Discretion: Stock Market Performance and Managerial Discretion

We examine the relationship between CEO ownership and stock market performance. We show that investing in firms in which the CEO owns a substantial fraction of shares (for example more than 10% of outstanding shares) leads to large abnormal returns. A strategy based on public information about managerial ownership delivers annual abnormal returns (annual alphas in a Fama-French portfolio setting) of 4 to 10%. These results are stronger for firms in which the impact of the CEO can expected to be large, i.e. in firms in which the CEO has a lot of discretion. Our paper has two main parts. In the first part, we derive our main results and show that they are robust and economically meaningful. In the second part, we discuss different potential explanations for our results.