CEO Ownership as an Indicator of Stock Performance

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.

The paper generally finds that shares of companies with higher rates of CEO ownership deliver substantial excess returns. As it notes (pages 26-27):

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.

Some questions I can think of:
 
  1. Most notably, contra EMH, why haven’t investors taken advantage of what seems to be a passive means of substantially outperforming the market?
  2. 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.)

Milo King’s Introduction

Hello, all! I am Milo King, the other author here. I am an undergraduate student majoring in economics and mathematics at the University of Maryland, College Park.

Part of the reason I (co-)created this blog as a collaborative effort was to ensure that I would actually stick to it. Otherwise, I intend to post a variety of different things here: thoughts on economic topics, interesting news items and links to other materials, and questions for readers.

My interests are more macro-oriented than Michael’s, with emphasis on monetary and financial economics. As with him (and probably a fair number of people in the field), though, I also take interest in a wide variety of other topics, including economic history, law and economics, and growth theory, and regulatory analysis.

In any case, I should have some (short-ish) posts up soon to get things going. I hope you continue to keep this blog in your reading list!

Michael Checking In

Hey readers from the future going back to the first page!

I’m Michael Tontchev, co-author with Milo King of our new blog geared toward economics and political theory. I’m an economics and computer science undergraduate student at the University of Maryland, College Park, as well as a (fresh) columnist for Turning Point USA (see my articles here).

I wanted to start this blog to create an outlet to exchange ideas with the world of economics without needing to have anything well-polished (such as my articles for TPUSA). Some of my posts will simply be collections of links, others will be questions I have for economists and lay readers, while others still will be pieces of analysis that I’m tossing around in my head on which I’d appreciate input. This is also a way for me to coax more written thoughts from Milo, whom I consider to be a fairly intelligent and dedicated budding economist. (Hi Milo!)

As can be guessed from the title of our blog, I tend to be a market-oriented student of economics and I take the fundamental principles of economics seriously, with an emphasis on mutually-beneficial exchange. I have a few different sources of influence that will become more apparent as I write more, yet as much as possible I will try to seek out what’s true in positive economics regardless of the label under which it falls. Hence, on a Monday you might see me criticize neoclassical economics, while on the next Thursday I will vehemently defend it against its critics.

Our focus will often be on the price mechanism and its purpose in bringing order to a world of nearly-infinitely varied consumer wants and production possibilities.

My main interests lie in microeconomic theory, especially in industrial organization. However, I do enjoy learning about a wide variety of microeconomic topics, including labor economics, game theory, institutional economics, models of market failure, and public choice theory. Does that leave room for much of anything else? I suppose I should enjoy my days of being able to cast a broad net.