By Liam Pleven 

Many chief executives hold major equity stakes in their companies while turning them into powerhouses. Think of Jeff Bezos of Amazon.com, FedEx's Fred Smith and Steve Wynn of Wynn Resorts, to name a few high-profile examples.

Recent research points to a connection between high levels of executive ownership and stock-market success. Companies led by someone who owns at least 5% of the shares outstanding on average generate higher returns for investors, according to a study published last year in the Journal of Finance. When the executive holds at least 10%, the level of outperformance is greater, the authors found.

The report underscores the potential benefits of having the best interests of top executives aligned with those of investors.

But that doesn't mean you should plow your money into stocks with high CEO ownership levels. In fact, there are good reasons not to.

Translating academic research into a practical investing strategy can be risky. Many studies find potential links between investment criteria and performance, but don't prove the former drives the latter. What might have been effective in the past may not work in the future. And you could expose yourself to hidden risks.

Getting an Edge

The authors of the study, Ulf von Lilienfeld-Toal of the University of Luxembourg and Stefan Ruenzi of the University of Mannheim in Germany, looked at how hypothetical portfolios of U.S. stocks with high levels of executive ownership performed from 1988 to 2010. The study focused on shares that the executive--usually the CEO, and often the founding CEO--owned outright, largely excluding options and similar types of long-term incentive compensation.

A portfolio divided equally among companies in which an executive owned at least 5% of the shares outperformed other firms with a similar risk profile by an average of 5.7 percentage points annually, according to the study.

A similar portfolio divided among companies in which an executive owned at least 10% of the shares outperformed by an average of 6.2 percentage points annually.

One likely reason, according to the authors: having the CEO own a lot of shares can produce the same kind of beneficial effect as strong corporate governance, which is generally intended to ensure that managers focus on maximizing shareholder value.

"Giving managers freedom to follow their own course of action is a good idea if incentives are in place that make sure they use this freedom in the right way," the researchers wrote.

Mr. von Lilienfeld-Toal says constructing a similar portfolio wouldn't be complicated. "You don't need to have a Ph.D. in finance to do this," he said in an interview.

But it is worth keeping in mind some of the things that could go wrong if you did.

Hunting for Gaps

First of all, professional investors constantly hunt for gaps between current price and long-term value. If they believe that firms with high CEO ownership are better bets, they may have taken advantage of it by now and eliminated the opportunity for others.

The researchers found no evidence that was happening in the period studied. They suggested, in fact, that investors may avoid bidding up share prices when the CEO owns lots of stock. Otherwise, he or she could profit immediately by selling the stake without having to put in the hard work of growing the company.

But that is just a theory. The bottom line is that just because holding shares of these kinds of companies could have paid off between 1988 and 2010 doesn't mean it will in 2015 and beyond.

In addition, a portfolio comprised of such companies also could expose an investor to more risk than if they owned a fund that invested in a broad market index, such as the Vanguard Total Stock Market exchange-traded fund, which charges annual fees of 0.05%, or $5 on a $10,000 investment.

Companies with a high level of CEO ownership "might be riskier" than similar companies, says Randall Morck, a finance professor at the University of Alberta who has studied companies where executives own stock and praised the new study for adding to the body of research on the subject.

For example, the share price of this kind of company could be particularly vulnerable if the CEO were sidelined by illness or death. Such a risk could be mitigated with a diverse portfolio, because such problems would be unlikely to hit many companies at once.

Companies where the CEO owns more than 10% of the shares "tend to be smaller and younger than the average firm," the study found. A blue-chip company that has been in business for more than 50 years is less likely to be run by a founder who owns 11% of the stock.

More worrisome are risk factors you may not know about. If you are getting higher returns, it is safer to assume you are taking on greater risk in exchange.

Practical hurdles also are worth noting. The hypothetical portfolios the researchers constructed typically comprised more than 1,000 stocks.

The Price of Admission

An ordinary investor would likely either need to pay for data or do the research, which would be time-consuming. Then the investor would need to pay brokerage fees to purchase each stock, which could quickly eat into any added returns. The researchers also found evidence of outperformance in portfolios focused on firms in which the CEO owned more than 10% of the shares, even if they weren't rebalanced annually, which could limit trading costs.

Narrowing the field could also limit the costs of trading. There are only 108 companies in the broad-market S&P 1500 in which the CEO owns at least 5% of the shares, according to data from S&P Capital IQ. In the S&P 500, which focuses on larger companies, there are only 22, including Amazon.com, FedEx and Wynn Resorts.

But investors who focus on a small pool of large firms could lose the benefits of diversification. Companies with high CEO ownership aren't immune from trouble--just consider Bear Stearns, whose longtime chief executive, James Cayne, owned more than 5% of the shares, according to a regulatory filing in 2007, the year before the firm was sold on the brink of collapse.

Investors should think of executive ownership as one of many factors worth considering before investing in a stock. And they should remember that any individual stock is risky, regardless of how much the CEO has at stake.

Email: liam.pleven@wsj.com

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