The interconnection between executive shareholding and firm performance

Abstract: There has been a long standing debate regarding how firms can alleviate the agency problem and align the interests of the agent with those of the principal. In this study, we theorize that if firms can incentivize executives to act more like owners as opposed to agents, it will lead to better performance of the firm. We hypothesize that there are two approaches how this may be achieved. The first is when the executive has a substantial shareholding in the firm. The second is when the firm employs a long-term incentive program, which is based on equity or the market value of equity. In regard to the first approach, we have found it necessary to put the value of the executives’ shareholding in relation to an “anchor” in an effort to account for different individuals’ perceptions of the value of money. The anchor that we have used is the executives’ annual salary. Subsequently, we have designed a new variable which we call the CEO level of engagement, constituted by the value of the executives’ shareholding divided by the executives’ annual salary. The purpose of this thesis is thus to investigate whether or not we can identify a relationship between the CEO level of engagement and the use of equity based long-term incentive programs with the stock market performance of firms as well as with key financial performance indicators, such as return on equity, return on capital employed, change in revenue and change in the number of employees. To achieve this, we have employed a quantitative research approach based on secondary data mainly from annual reports and stock market data. We have investigated the performance of 56 firms on Stockholm Large Cap OMX over the period 2011 – 2016 and analyzed the data with descriptive statistics and regression analysis. Our findings suggest that there is a relationship between the CEO level of engagement and stock market performance, and that the relationship is statistically significant. However, our findings only provide partial support for a relationship between the CEO level of engagement and certain financial performance indicators, specifically the change in number of employees from one year to the next. Furthermore, our study does not adequately support the theory that there is a relationship between the use of equity based long-term incentive programs with either stock market performance or key financial performance indicators.