Why Do CEOs Hold Equity?

U.S. CEOs hold a large amount of equity that is not explicitly constrained by ownership guidelines or vesting requirements. Although the average CEO receives a risk premium in his annual pay for holding unconstrained equity, most CEOs hold more equity than is compensated by the risk premium in their pay. We explore reasons for these seemingly voluntary equity holdings. CEOs hold more equity when they are more risk-tolerant, when their equity portfolio has a greater tax burden, and in some cases, when they exhibit greater overconfidence. Excess equity holdings are positively correlated across executives within a firm, potentially indicating the presence of firm-specific monitoring needs. We find no evidence that informed trading explains equity holdings.