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Insiders and Incentives

Paper Session

Friday, Jan. 4, 2019 8:00 AM - 10:00 AM

Hilton Atlanta, 209-210-211
Hosted By: American Finance Association
  • Chair: Camelia M. Kuhnen, University of North Carolina

The Dollar Profits to Insider Trading

Peter Cziraki
,
University of Toronto
Jasmin Gider
,
Tilburg University

Abstract

While prior research has documented large percentage returns to insider trading, it is not clear whether insiders make large dollar profits on their trades. This is the first paper to study these profits. We find that dollar profits are economically small for a typical insider, the median insider earning abnormal profits of $464 per year. Variables that predict percentage returns fail to predict dollar profits. Insiders who trade infrequently make high returns, while insiders who trade frequently make large dollar profits. We exploit a legally-imposed discontinuity to construct a new measure of insiders’ intentions, which predicts both returns and dollar profits. This measure successfully identifies a small subset (0.5%) of insiders whose profits are significantly higher with a median of $2,500 per year. Finally, we use variation in SEC budgets over time to assess whether monitoring reduces insider-trading profits. Our work highlights that using dollar profits as opposed to percentage returns offers contrasting evidence on a number of questions about insider trading. We argue that profits are a more precise measure for testing agency theories.

The Long-Term Consequences of Short-Term Incentives

Alex Edmans
,
London Business School
Vivian Fang
,
University of Minnesota
Allen Huang
,
Hong Kong University of Science and Technology

Abstract

This paper shows that short-term stock price concerns induce CEOs to take value-reducing actions. Vesting equity, our measure of short-term concerns, is positively associated with the probability of a firm repurchasing shares, the amount of shares repurchased, and the probability of the firm announcing a merger or acquisition (M&A). When vesting equity increases, stock returns are more positive in the two quarters surrounding both repurchases and M&A, but more negative in the two years following repurchases and four years following M&A. We show that a potential driver of the negative long-run returns to M&A is subsequent goodwill impairment. These results are inconsistent with CEOs buying underpriced stock or companies to maximize long-run shareholder value, but consistent with these actions being used to boost the short-term stock price and improve the conditions for CEO equity sales. Overall, by identifying actions that carry clear value implications, this paper documents the long-term negative consequences of short-term incentives.

The additional costs of CEO compensation: The effect of relative wealth concerns of employees

Ingolf Dittmann
,
Erasmus University Rotterdam
Christoph Schneider
,
Tilburg University
Yuhao Zhu
,
Erasmus University Rotterdam

Abstract

Do employees who compare themselves to the CEO matter for executive compensation? We hypothesize employees who have relative wealth concerns and compare their wage to the CEO's pay. Using German establishment-level wage data, we indeed show that employee wages are increasing in CEO compensation. We use a regulatory shock to the public observability of German CEO compensation and establish causality by using a difference-in-difference approach. Moreover, we control for firm and establishment fixed effects. When CEO compensation increases by 1%, the median employee's wage increases by about 0.04%. Our findings suggest that relative wealth concerns of employees are an important driver of wages and significantly increase the costs of executive compensation.
Discussant(s)
Heather Tookes
,
Yale University
Mathias Kronlund
,
University of Illinois
Dirk Jenter
,
London School of Economics
JEL Classifications
  • G3 - Corporate Finance and Governance