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Voluntary and mandatory skin in the game: understanding outside directors’ stock holdings

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  • Sanjai Bhagat
  • Heather Tookes

Abstract

We examine the determinants of equity ownership by outside directors as well as the relationship between ownership and operating performance. Unlike previous studies of equity ownership by directors, we use hand-collected data on firm-level policies requiring director ownership for S&P 500 firms during the years 2003 and 2005. Ownership requirements allow us to shed further light on the determinants of director holdings and to separate voluntary from mandatory holdings of directors. If ownership requirements reflect optimal ownership levels (from the firm's perspective), they provide a useful identification tool in the examination of ownership--performance relationships. Our primary findings are that mandatory holdings are unrelated to future performance; this is consistent with the theory that ownership requirements reflect optimal ownership levels. By contrast, voluntary holdings are positively and significantly related to future performance, suggesting that they perform an incentivizing role for directors.

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  • Sanjai Bhagat & Heather Tookes, 2012. "Voluntary and mandatory skin in the game: understanding outside directors’ stock holdings," The European Journal of Finance, Taylor & Francis Journals, vol. 18(3-4), pages 191-207, April.
    • Handle: RePEc:taf:eurjfi:v:18:y:2012:i:3-4:p:191-207
    DOI: 10.1080/1351847X.2011.579739
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    Cited by:

    1. Gorshunov, Mikhail A. & Armenakis, Achilles A. & Harris, Stanley G. & Walker, H. Jack, 2021. "Quad-qualified audit committee director: Implications for monitoring and reducing financial corruption," Journal of Corporate Finance, Elsevier, vol. 66(C).
    2. Benson, Bradley W. & Lian, Qin & Wang, Qiming, 2016. "Stock ownership guidelines for CEOs: Do they (not) meet expectations?," Journal of Banking & Finance, Elsevier, vol. 69(C), pages 52-71.
    3. Cziraki, Peter, 2018. "Trading by bank insiders before and during the 2007–2008 financial crisis," Journal of Financial Intermediation, Elsevier, vol. 33(C), pages 58-82.
    4. Benamraoui, Abdelhafid & Jory, Surendranath Rakesh & Mazouz, Khelifa & Shah, Neeta & Gough, Orla, 2019. "The effect of block ownership on future firm value and performance," The North American Journal of Economics and Finance, Elsevier, vol. 50(C).

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