Corporate Governance Matters: A Closer Look at Organizational Choices and Their Consequences

9. Executive Equity Ownership

In this chapter, we examine the relationship between equity ownership and executive behavior. In theory, executives who hold equity in the companies they manage—either directly in the form of stock ownership or indirectly through options, restricted stock, and performance shares—have greater incentive to improve the economic value of the firm. In addition, equity holdings dissuade self-interested behavior, in that any action the executive takes that impairs firm value will inflict corresponding damage to the executive’s personal wealth (although not on a “dollar-for-dollar” basis, given that executives are also compensated in forms other than equity). As a result, equity ownership is an important tool that companies ...