CEO ownership and stock market performance : an empirical study on companies listed on Oslo Stock Exchange from 2010-2016

Abstract

In this thesis, we examine the impact on stock market performance for companies on Oslo Stock Exchange in which the CEO voluntarily owns a significant fraction of the firm’s equity. We discuss the findings based on two opposing views; the incentive-alignment hypothesis and the entrenchment hypothesis. Our research method is based on a trading-strategy where we construct different portfolios sorted on CEO ownership, using publicly available information. We examine the relationship between CEO ownership and stock market performance using monthly stock data from 2010 to 2016. Using the Fama-French Four Factor Model, we find that firms with high CEO ownership deliver significant negative abnormal returns compared to the market. Moreover, we find that the underperformance increases with higher ownership. The results still hold after controlling for industry effects, and when regressing multivariate regressions where we include a set of firm-specific control variables combined with industry- and time-fixed effects. We also find that firms with no CEO ownership underperform compared to the market. The findings indirectly imply that firms where the CEO owns a small fraction of the firm`s outstanding shares, but less than 5%, outperform both firms without CEO ownership and firms with CEO ownership above 5%. The initial positive effect from CEO ownership on stock market performance indicates improving incentives, while the subsequent negative effect suggests managerial entrenchment. We perform additional analysis in order to understand the strong underperformance in the stock market. First, we examine if high ownership CEOs have been able to secure their employment at the firm. We observe that these CEOs have a lower probability of being replaced despite a strong underperformance in the stock market, which indicates that they are entrenched. Second, we examine various accounting measures of performance and firm policies to investigate if the strong stock market underperformance might be a consequence of an entrenched manager pursuing his own self-interest at the shareholders` expense. The findings are inconclusive, but we find that operating performance, firm policies and equity risk partly explain the stock market underperformance for firms with high ownership CEOs.