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Why Do Insiders Hedge Their Ownership? An Empirical Examination

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  • Carr Bettis
  • John Bizjak
  • Swaminathan Kalpathy

Abstract

type="main"> We examine different types of derivative instruments used by corporate insiders. These instruments are more likely to be used when there is greater insider ownership and greater capital market scrutiny. While these instruments may be allowed by boards to mitigate agency problems relating to overvalued equity and high equity-based pay, our evidence regarding forwards and collars is more consistent with the strategic timing of transactions by insiders. Exchange funds appear to be primarily used for diversification and are associated with higher personal tax rates. Collectively, our results suggest that there is significant heterogeneity in the motivation to use these instruments.

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  • Carr Bettis & John Bizjak & Swaminathan Kalpathy, 2015. "Why Do Insiders Hedge Their Ownership? An Empirical Examination," Financial Management, Financial Management Association International, vol. 44(3), pages 655-683, September.
    • Handle: RePEc:bla:finmgt:v:44:y:2015:i:3:p:655-683
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    3. Stefano Colonnello & Giuliano Curatola & Shuo Xia, 2022. "Trading Away Incentives," Working Papers 2022:16, Department of Economics, University of Venice "Ca' Foscari".
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    6. Yogesh Chauhan & Ajay Kumar Mishra & Ronald W. Spahr, 2021. "Stock pledging and firm risk: Evidence from India," Financial Management, Financial Management Association International, vol. 50(1), pages 261-280, March.
    7. Affaf Asghar Butt & Main Sajid Nazir & Hamera Arshad & Aamer Shahzad, 2018. "Corporate Derivatives and Ownership Concentration: Empirical Evidence of Non-Financial Firms Listed on Pakistan Stock Exchange," JRFM, MDPI, vol. 11(3), pages 1-15, June.
    8. Lee M. Dunham, 2018. "Does a CEO’s hedging ability affect the firm’s capital structure?," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 42(3), pages 615-630, July.
    9. Marie‐Hélène Gagnon & Aurélien Philippot, 2020. "Are Incentive Contract Settlements Nonevents?," International Review of Finance, International Review of Finance Ltd., vol. 20(4), pages 983-992, December.
    10. Ronald Anderson & Michael Puleo, 2020. "Insider Share-Pledging and Equity Risk," Journal of Financial Services Research, Springer;Western Finance Association, vol. 58(1), pages 1-25, August.
    11. Shen, Yinjie (Victor) & Wang, Wei & Zhou, Fuzhao, 2021. "Insider pledging in the U.S," Journal of Financial Stability, Elsevier, vol. 53(C).
    12. Jongwon Park & Sunyoung Kim & Albert Tsang, 2023. "CEO Personal Hedging and Corporate Social Responsibility," Journal of Business Ethics, Springer, vol. 182(1), pages 199-221, January.
    13. Soniya Mohil & Reena Nayyar & Archana Patro, 2020. "When is informed trading more prevalent?—An examination of options trading around Indian M&A announcements," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(6), pages 1011-1029, June.
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