The transaction cost theory on managerial ownership and firm value predicts that a deviation from optimal managerial ownership reduces firm value. This paper empirically tests the transaction cost theory by studying the relation between the deviations on both sides of optimal CEO ownership and firm value. We find that both above-optimal and below-optimal deviations reduce firm value. We find that the change in CEO ownership is associated with a higher abnormal return if it moves CEO ownership towards the optimal level, and that the change in CEO ownership is associated with a lower abnormal return if it moves CEO ownership away from the optimal level. These findings are consistent with the transaction cost theory on managerial ownership and firm value.