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An Examination of Director Stock Ownership Requirements
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Consistent with agency theory, corporate governance best practices encourage the use of a director stock ownership requirement (SOR) as a tool to align directors’ incentives with shareholders’ interests. Using a sample of 714 firms that adopt a director SOR from 1998 to 2013, I analyze the determinants of SOR adoption and find that firms with larger boards, lower outside director ownership, and higher institutional ownership are more likely to implement a director SOR. I then show that firms adopting a director SOR demonstrate improved monitoring over financial reporting. However, I find no evidence indicating that adopting firms have greater CEO performance-turnover sensitivity after director SOR adoption. Further, it appears that firms adopting a director SOR have greater excess CEO compensation. Finally, I classify adopted plans as substantial or symbolic and show that substantial adopters demonstrate improved financial reporting monitoring while symbolic adopters do not. My results suggest that a director SOR can be effective in improving board financial reporting monitoring performance when the requirement is substantial. However, many firms appear to adopt symbolic requirements, possibly as a form of corporate governance window-dressing, rather than as an effective tool to increase the alignment between directors and shareholders.
Josefy, Amanda Bree (2016). An Examination of Director Stock Ownership Requirements. Doctoral dissertation, Texas A & M University. Available electronically from