Required CEO Stock Ownership : Consequences for Risk-taking and Compensation

In response to corporate governance concerns, SEC disclosure rules, and encouragement by Institutional Shareholder Services, most large U.S. public firms have adopted executive stock ownership requirements in recent years. Compared to CEOs already in compliance, CEOs who have not yet fulfilled the requirement at adoption subsequently increase stockholdings, exposing themselves to more company-specific risk, potentially providing risk-reduction incentives and diminishing their subjective valuation of firm equity. Using changes in state capital gains tax rates as an instrument, we find that these CEOs subsequently reduce firm risk through diversifying M&A, less financial leverage, and smaller R&D investment. They experience a deterioration in firm performance and valuation, but receive significantly increased stock grants. A placebo test further addresses endogeneity. Our evidence suggests that boards should exercise judgment when adopting this popular governance initiative