CEO Ownership, External Governance, and Risk-taking

We find a significant hump-shaped relation between firm valuation and CEO ownership when external governance (EG) is weak, but the relation is insignificant when EG is strong. These interactive effects are identified while controlling for firm-fixed effects. The results imply that CEO ownership and EG are substitutes in mitigating agency problems at low levels of ownership. At large ownership, the combination of large voting rights and high wealth-performance sensitivity causes CEOs to take insufficient risk, unless strong EG holds them accountable for performance. To identify channels through which CEO ownership affects firm value, we examine R&D, which tends to be discretionary and risky. We find strikingly similar interactive effects on R&D and conclude that CEO ownership affects both effort and risk-taking when EG is weak. EG is measured by product market competition or institutional ownership concentration. Our results are robust to endogeneity issues concerning CEO ownership and EG, and a battery of other tests