The relation between insider-trading restrictions and executive compensation.

摘要

I investigate the idea that insider trading plays a role in rewarding and motivating executives by examining the relation between restrictions on corporate insiders' trading and the components of the insiders' compensation. As documented in Jeng (1998) and Bettis, Coles, and Lemmon (1998), many firms forbid their insiders to trade except during a window following quarterly earnings announcements. I proxy for the existence of these timing restrictions by examining the firm-specific distribution of insider trades around quarterly earnings announcements from 1994--1997. Consistent with theoretical predictions that insider trading is a form of compensation, I find that insiders are compensated for timing restrictions with higher levels of cash and stock compensation relative to firms that do not impose timing restrictions. Consistent with arguments that insider trading mitigates executive risk-aversion and motivates insiders to increase firm performance, I find that incentive compensation is a larger portion of total compensation in firms that restrict insider trading relative to firms that do not. These differences exist after controlling for other economic determinants of executive compensation such as firm size, firm risk, growth opportunities and firm performance. To control for the endogeneity of the decision to select insider-trading restrictions, I use the two-stage procedures described in Heckman (1979) and Olsen (1980). Results using these procedures still find a significant and positive relation between timing restrictions and the level of compensation and the use of incentive compensation. The results suggest that insider trading plays a role in rewarding and motivating executives.