The extent of a manager's shareholdings in his employing firm is modelled as part (along with the extent of reliance on incentive contracting) of an "optimal contract" between the manager and other shareholders. Implications are that manager shareholding will be less in firms with greater variance of shareholder income and in non-cash businesses. Empirical evidence supports these implications as well as the contention that where manager shareholding is less, there is more reliance on incentive contracting. Consequently, there may be no difference in managerial behavior where manager shareholding is great and where it is small.