IDEAS home Printed from https://ideas.repec.org/a/bla/joares/v41y2003i3p525-551.html
   My bibliography  Save this article

The Relation Between Insider‐Trading Restrictions and Executive Compensation

Author

Listed:
  • Darren T. Roulstone

Abstract

In this study I investigate the relation between firm‐level insider‐trading restrictions and executive compensation. Using a trading‐window proxy for the existence of such restrictions, I test predictions that insiders will demand compensation for these restrictions and that firms will need to increase incentives to restricted insiders. I find that firms that restrict insider trading pay a premium in total compensation relative to firms not restricting insider trading, after controlling for economic determinants of pay. Furthermore, these firms use more incentive‐based compensation and their insiders hold larger equity incentives relative to firms that do not restrict insider trading. These results hold after controlling for the endogenous decision to restrict insiders and are consistent with the notion that insider trading plays a role in rewarding and motivating executives.

Suggested Citation

  • Darren T. Roulstone, 2003. "The Relation Between Insider‐Trading Restrictions and Executive Compensation," Journal of Accounting Research, Wiley Blackwell, vol. 41(3), pages 525-551, June.
    • Handle: RePEc:bla:joares:v:41:y:2003:i:3:p:525-551
    DOI: 10.1111/1475-679X.00115
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/1475-679X.00115
    Download Restriction: no
    File URL: https://libkey.io/10.1111/1475-679X.00115?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Baiman, S & Verrecchia, RE, 1996. "The relation among capital markets, financial disclosure, production efficiency, and insider trading," Journal of Accounting Research, Wiley Blackwell, vol. 34(1), pages 1-22.
    2. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    3. Core, John & Guay, Wayne, 1999. "The use of equity grants to manage optimal equity incentive levels," Journal of Accounting and Economics, Elsevier, vol. 28(2), pages 151-184, December.
    4. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 31(3), pages 129-137.
    5. John Elliott & Dale Morse & Gordon Richardson, 1984. "The Association between Insider Trading and Information Announcements," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 521-536, Winter.
    6. Seyhun, H Nejat, 1992. "The Effectiveness of the Insider-Trading Sanctions," Journal of Law and Economics, University of Chicago Press, vol. 35(1), pages 149-182, April.
    7. Noe, Christopher F., 1999. "Voluntary disclosures and insider transactions," Journal of Accounting and Economics, Elsevier, vol. 27(3), pages 305-326, July.
    8. Meulbroek, Lisa K, 1992. "An Empirical Analysis of Illegal Insider Trading," Journal of Finance, American Finance Association, vol. 47(5), pages 1661-1699, December.
    9. Mehran, Hamid, 1995. "Executive compensation structure, ownership, and firm performance," Journal of Financial Economics, Elsevier, vol. 38(2), pages 163-184, June.
    10. Banker, Rd & Datar, Sm, 1989. "Sensitivity, Precision, And Linear Aggregation Of Signals For Performance Evaluation," Journal of Accounting Research, Wiley Blackwell, vol. 27(1), pages 21-39.
    11. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    12. Kato, Takao & Hebner, Kevin J., 1997. "Insider trading and executive compensation: Evidence from the U.S. and Japan," International Review of Economics & Finance, Elsevier, vol. 6(3), pages 223-237.
    13. Ausubel, Lawrence M, 1990. "Insider Trading in a Rational Expectations Economy," American Economic Review, American Economic Association, vol. 80(5), pages 1022-1041, December.
    14. Haddock, David D & Macey, Jonathan R, 1987. "Regulation on Demand: A Private Interest Model, with an Application to Insider Trading Regulation," Journal of Law and Economics, University of Chicago Press, vol. 30(2), pages 311-352, October.
    15. Michael J. Fishman & Kathleen M. Hagerty, 1992. "Insider Trading and the Efficiency of Stock Prices," RAND Journal of Economics, The RAND Corporation, vol. 23(1), pages 106-122, Spring.
    16. Eli Ofek & David Yermack, 2000. "Taking Stock: Equity‐Based Compensation and the Evolution of Managerial Ownership," Journal of Finance, American Finance Association, vol. 55(3), pages 1367-1384, June.
    17. Core, John E. & Holthausen, Robert W. & Larcker, David F., 1999. "Corporate governance, chief executive officer compensation, and firm performance," Journal of Financial Economics, Elsevier, vol. 51(3), pages 371-406, March.
    18. Bebchuk, Lucian Arye & Fershtman, Chaim, 1994. "Insider Trading and the Managerial Choice among Risky Projects," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 29(1), pages 1-14, March.
    19. Penman, Stephen H, 1982. "Insider Trading and the Dissemination of Firms' Forecast Information," The Journal of Business, University of Chicago Press, vol. 55(4), pages 479-503, October.
    20. Garfinkel, Jon A., 1997. "New evidence on the effects of federal regulations on insider trading: The Insider Trading and Securities Fraud Enforcement Act (ITSFEA)," Journal of Corporate Finance, Elsevier, vol. 3(2), pages 89-111, April.
    21. John Core & Wayne Guay, 2002. "Estimating the Value of Employee Stock Option Portfolios and Their Sensitivities to Price and Volatility," Journal of Accounting Research, Wiley Blackwell, vol. 40(3), pages 613-630, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Wisniewski, Tomasz P., 2004. "Reexamination of the link between insider trading and price efficiency," Economic Systems, Elsevier, vol. 28(2), pages 209-228, June.
    2. Frankel, Richard & Li, Xu, 2004. "Characteristics of a firm's information environment and the information asymmetry between insiders and outsiders," Journal of Accounting and Economics, Elsevier, vol. 37(2), pages 229-259, June.
    3. Adriana Korczak & Piotr Korczak & Meziane Lasfer, 2010. "To Trade or Not to Trade: The Strategic Trading of Insiders around News Announcements," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(3‐4), pages 369-407, April.
    4. Adriana Korczak & Piotr Korczak & Meziane Lasfer, 2010. "To Trade or Not to Trade: The Strategic Trading of Insiders around News Announcements," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(3‐4), pages 369-407, April.
    5. Juha-Pekka Kallunki & Henrik Nilsson & Janne Peltoniemi, 2009. "Regulated and unregulated insider trading around earnings announcements," European Journal of Law and Economics, Springer, vol. 27(3), pages 285-308, June.
    6. Wielhouwer, Jacco L., 2013. "When is public enforcement of insider trading regulations effective?," International Review of Law and Economics, Elsevier, vol. 34(C), pages 52-60.
    7. Alex Frino & Stephen Satchell & Brad Wong & Hui Zheng, 2013. "How much does an Illegal Insider Trade?," International Review of Finance, International Review of Finance Ltd., vol. 13(2), pages 241-263, June.
    8. Jonathan L. Rogers, 2008. "Disclosure Quality and Management Trading Incentives," Journal of Accounting Research, Wiley Blackwell, vol. 46(5), pages 1265-1296, December.
    9. Jie Hu & Thomas H. Noe, 1997. "The insider trading debate," Economic Review, Federal Reserve Bank of Atlanta, vol. 82(Q 4), pages 34-45.
    10. Rüdiger Fahlenbrach, 2009. "Shareholder Rights, Boards, and CEO Compensation," Review of Finance, European Finance Association, vol. 13(1), pages 81-113.
    11. Guanming He, 2023. "How do insider trading incentives shape nonfinancial disclosures? Evidence from product and business expansion disclosures," Review of Quantitative Finance and Accounting, Springer, vol. 60(1), pages 147-194, January.
    12. Skaife, Hollis A. & Veenman, David & Wangerin, Daniel, 2013. "Internal control over financial reporting and managerial rent extraction: Evidence from the profitability of insider trading," Journal of Accounting and Economics, Elsevier, vol. 55(1), pages 91-110.
    13. Maug, Ernst, 2002. "Insider trading legislation and corporate governance," European Economic Review, Elsevier, vol. 46(9), pages 1569-1597, October.
    14. Guanming He & Helen Mengbing Ren & Richard Taffler, 2021. "Do corporate insiders trade on future stock price crash risk?," Review of Quantitative Finance and Accounting, Springer, vol. 56(4), pages 1561-1591, May.
    15. Agrawal, Anup & Nasser, Tareque, 2012. "Insider trading in takeover targets," Journal of Corporate Finance, Elsevier, vol. 18(3), pages 598-625.
    16. Narayanan, Ranga, 2000. "Insider trading and the voluntary disclosure of information by firms," Journal of Banking & Finance, Elsevier, vol. 24(3), pages 395-425, March.
    17. Ke, Bin & Huddart, Steven & Petroni, Kathy, 2003. "What insiders know about future earnings and how they use it: Evidence from insider trades," Journal of Accounting and Economics, Elsevier, vol. 35(3), pages 315-346, August.
    18. Armstrong, Christopher S. & Guay, Wayne R. & Weber, Joseph P., 2010. "The role of information and financial reporting in corporate governance and debt contracting," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 179-234, December.
    19. Dean Katselas, 2020. "Strategic insider trading around earnings announcements in Australia," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(4), pages 3709-3741, December.
    20. Agrawal, Anup & Jaffe, Jeffrey F., 1995. "Does Section 16b deter insider trading by target managers?," Journal of Financial Economics, Elsevier, vol. 39(2-3), pages 295-319.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:joares:v:41:y:2003:i:3:p:525-551. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=0021-8456 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.