Some time ago, I was going back through old bookmarks when I found this Motley Fool piece by Alex Dumortier on stock returns and CEO ownership. He cites a 2010 paper, which seems to have been updated in May 2013 and titled CEO Ownership and Stock Market Performance, and Managerial Discretion, by Ulf Von Lilienfeld-Toal and Stefan Ruenzi.
Nevertheless, as an alternative approach, we also examine the returns of a completely passive buy and hold long-only strategy. We consider portfolios that buy into all ﬁrms with a CEO who owns more than 10% in the ﬁrst sample year and portfolios consisting of the top 10% of all ﬁrms according to managerial ownership in the ﬁrst sample year, respectively, without any re-balancing in the following years. The high ownership portfolios always deliver economically large alphas amounting to between 0.84% and 1.15% per month in the value-weighted case and between 0.60% and 0.78% per month in the equal-weighted case. Overall, these results show that even a simple low-cost buy and hold long only strategy based on managerial ownership would have earned substantial abnormal returns.
- Most notably, contra EMH, why haven’t investors taken advantage of what seems to be a passive means of substantially outperforming the market?
- Why are the effects of CEO ownership strongest in industries with weak product market competition? After all, if CEO ownership increases incentives for managerial competence (or is otherwise a signal of good management), it seems that this should be more useful for firms in more competitive industries. (One possible explanation is that management is more effectively “priced in” in companies in more competitive industries, as investors view said companies as more risky and needing of scrutiny.)