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Trading Away Incentives

Author

Listed:
  • Stefano Colonnello

    (Department of Economics, Ca' Foscari University of Venice; Halle Institute for Economic Research (IWH))

  • Giuliano Curatola

    (University of Siena)

  • Shuo Xia

    (Leipzig University; Halle Institute for Economic Research (IWH))

Abstract

Equity pay has been the primary component of managerial compensation packages at US public firms since the early 1990s. Using a comprehensive sample of top executives from 1992-2020, we estimate to what extent they trade firm equity held in their portfolios to neutralize increments in ownership due to annual equity pay. Executives accommodate ownership increases linked to options awards. Conversely, increases in stock holdings linked to option exercises and restricted stock grants are to a large extent neutralized through comparable sales of unrestricted shares. Variation in stock trading responses across executives hardly appears to respond to diversification motives. From a theoretical standpoint, these results challenge (i) the common, generally implicit assumption that managers cannot undo their incentive packages, (ii) the standard modeling practice of treating different equity pay items homogeneously, and (iii) the often taken for granted crucial role of diversification motives in managers' portfolio choices.

Suggested Citation

  • Stefano Colonnello & Giuliano Curatola & Shuo Xia, 2022. "Trading Away Incentives," Working Papers 2022:16, Department of Economics, University of Venice "Ca' Foscari".
    • Handle: RePEc:ven:wpaper:2022:16
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    References listed on IDEAS

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    More about this item

    Keywords

    Executive Compensation; Equity Incentives; Insider Trading; Hedging; Dynamic Contracting;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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