Managerial ownership and incentive alignment: Evidence from mandatory stock ownership plans

Mandatory stock ownership plans require executives to hold a minimum level of stock. I exploit these changes in managerial stock ownership to examine the relation between managerial ownership and manager-shareholder incentive alignment. In contrast to prior work that suggests equity incentives induce opportunistic managerial behavior, I find earnings management declines following the adoption of mandatory stock ownership plans relative to a propensity-matched control sample. I also posit and find a reduction in bid-ask spreads following plan adoptions, consistent with manager-shareholder incentive alignment improving market liquidity and decreasing information asymmetry. These findings are consistent with boards of directors contracting with managers to reduce the agency costs of equity.