Management Accounting Section Midyear Meeting

Contract Features and the Informativeness of Insider Trades

• In Event: White Collar Crime (Mixed Methods)

Abstract

Economic theory predicts that insiders reveal private information about the firm when they trade equity in their firm, especially if insiders trade because the prevailing market price deviates from their inside knowledge about the value of the firm. However, an insider trade does not reveal private information when purchasing to meet holding requirements or selling to meet liquidity needs or to diversify their portfolio. Contract terms related to CEO equity holding requirements and vesting conditions help market participants unravel the motivation for and the private information revealed by an insider trade. In a sample of trades by CEOs, we find that the market reaction to CEO equity trades is related to the CEO's contract terms. The market reaction to a CEO equity trade is greater when the CEO holds a large portfolio of unconstrained equity in the firm. We also find that the one-year abnormal return following a trade is significantly lower when a CEO that holds a large portfolio of unconstrained equity in the firm sells shares. Collectively, we provide evidence that publicly disclosed contract features provide context that help investors interpret the information revealed by insider sales and unravel private information.

Authors

• Brian Cadman, University of Utah

• Mate Szeles, University of Amsterdam