A company offers equity incentives to encourage CEOs to take actions that are in the interest of shareholders. At the same time, equity incentives have the potential to encourage undesirable behaviors.
This Quick Guide examines the effects of executive equity ownership.
It provides answers to the questions:
• How much wealth do CEOs have invested in their companies?
• Does equity ownership improve performance?
• Does it encourage risk taking?
• What “bad” behaviors might occur?
• Should the board allow CEOs to sell or hedge their shares?
For an expanded discussion, see Corporate Governance Matters: A Closer Look at Organizational Choices and Their Consequences (Second Edition) by David Larcker and Brian Tayan (2015): http://www.gsb.stanford.edu/faculty-research/books/corporate-governance-matters-closer-look-organizational-choices
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Copyright 2015 by David F. Larcker and Brian Tayan. All rights reserved.