CEO Discretionary Power, Unconstrained Stock Ownership, and Stock Trading : Theory and Evidence

This paper examines CEOs’ holding and trading of the unconstrained firm stock they own, i.e., vested and sellable firm shares. I first develop a theoretical model of why CEOs hold sellable shares in their own firm when doing so is riskier than holding a more diversified portfolio. In this model, greater stock ownership allows the CEO to exercise discretionary power more easily and extract rents from the company. My model predicts that CEOs desire to hold more firm stock and therefor are less likely to sell stock when they have greater discretionary power. This empirical prediction is supported by tests using non-institutional ownership and the CEO holding the “Chairman’ title as the proxies for discretionary power. Using stock trading data in S&P 1500 firms, I find that both measures are negatively (positively) associated with the CEO’s stock sale (purchase) activities. Overall, this study provides new insights concerning CEOs’ decisions to own their company’s stock