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Insider Trading and Pay‐Performance Sensitivity: An Empirical Analysis

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  • Wei Zhang
  • Steven F. Cahan
  • Arthur C. Allen

Abstract

We examine whether the sensitivity of pay to performance is associated with the amount of insider trading that managers undertake. Because insider trading profits represent an alternative form of compensation, we expect that firms will consider the compensation component provided by insider trading when designing remuneration contracts. Employing a proxy for insider trading that captures the degree to which managers trade on private information, we find evidence that an increased (a decreased) level of insider trading is associated with a decreased (an increased) pay‐performance sensitivity.

Suggested Citation

  • Wei Zhang & Steven F. Cahan & Arthur C. Allen, 2005. "Insider Trading and Pay‐Performance Sensitivity: An Empirical Analysis," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(9‐10), pages 1887-1919, November.
    • Handle: RePEc:bla:jbfnac:v:32:y:2005:i:9-10:p:1887-1919
    DOI: 10.1111/j.0306-686X.2005.00651.x
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    References listed on IDEAS

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