Do Executives Hold on to Equity-Linked Incentives? The Role of Minimum Shareholding Policies

Abstract

Previous literature documents that executives tend to cash out equity incentives when equity-linked compensation vests. Such a behavior destroys long-term incentives and hence is costly to outside shareholders. It is recommended that the unloading of incentives can be limited when the firm adopts a minimum executive shareholding policy. In this paper we provide the first evidence on the effectiveness of such policies. We find that the policies have a very limited effect on managerial behavior. They do not encourage larger retention of shares acquired from exercised options and from vested performance shares but somewhat increase share accumulation through other channels, for example open market purchases. We identify factors in the design and enforcement of the policies that improve their effectiveness. We also show that the lack of compliance with the policy has potentially important economic implications in the form of weaker firm performance and lower valuations. Our results have implications for the debate on executive remuneration regulations and practices.