OC - investment decisions - distortions
OC leads to higher sensitivity CF.
CF sensitivity will be higher in equity dep firms (most constrained firms)
Oc triggered by…
- Illusion of control
- Typical CEO is also highly commitment to good outcomes - influence human capital
- Abstract reference point
Traditional expl
Agency cost: high Cf and high D
Asymmetric info: high CF but low Distortion
3 measurements used for OC
If they were rational they should diversify as much as possible and get rid of firm stock asap.
1. Holder 67% : ceo should sell immediately after vesting period when stock is 67% in the money (benchmark)
- Longholder: if ceo keeps till expiration date. Most conservative measure
- Net buyer: if ceo purchases additional stock even though already high exposure to firk risk
Inside information
If ceo has inside info it makes sense why he keeps it longer.
- persistance: its impossible for a ceo to constantly have info
- performance: if it was good info it should pay off (positive alpha). On average ceo dont beat the market
Signalling
Signal to market that firms prospects are better than others
- lower info symmetry, value firm increases, sensitivity goes away. Net buyer can measure this since its measured in two disjoint periods
Risk tolerance
Ceo is low risk averse. But then he should be willing to lever up (borrow debt = sell stocks) and thus less sensitive to cash
Tax reasons
To delay payment of taxes
Doesnt explain add purchases. Doesnt predict higher sensitivity
Procrastination
> 8% still conducts other transactions. Should not be in Net buyer: buying add purchases
