IDEAS home Printed from https://ideas.repec.org/a/spr/jecfin/v28y2004i2p270-284.html

Compensation-based stock trading by corporate executive and aggregate management ownership of the firm: Some additional evidence

Author

Listed:
  • Zahid Iqbal

  • Shekar Shetty

Abstract

Managers place a low value on equity-based compensation because it exposes them to the risk of the firm. Such undervaluation and the need to achieve diversification may force a manager to sell his own stock of the firm in response to equity-based awards. In this paper we examine whether such stock selling by an executive depends on the aggregate level of management ownership of the firm. We argue that stock selling occurs at a high level of aggregate ownership where an executive has a low probability of being replaced. Our findings support this “management ownership” argument of compensation-based stock trading. One implication is that the board's effort to minimize agency conflicts becomes less effective once aggregate ownership increases to a certain threshold level. (JEL G30, G32) Copyright Springer 2004

Suggested Citation

  • Zahid Iqbal & Shekar Shetty, 2004. "Compensation-based stock trading by corporate executive and aggregate management ownership of the firm: Some additional evidence," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 28(2), pages 270-284, June.
    • Handle: RePEc:spr:jecfin:v:28:y:2004:i:2:p:270-284
    DOI: 10.1007/BF02761617
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/BF02761617
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/BF02761617?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
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Lisa Meulbroek, 2001. "The Efficiency of Equity-Linked Compensation: Understanding the Full Cost of Awarding Executive Stock Options," Financial Management, Financial Management Association, vol. 30(2), Summer.
    2. Rajesh K. Aggarwal & Andrew A. Samwick, 1999. "The Other Side of the Trade-off: The Impact of Risk on Executive Compensation," Journal of Political Economy, University of Chicago Press, vol. 107(1), pages 65-105, February.
    3. Dann, Larry Y. & DeAngelo, Harry, 1988. "Corporate financial policy and corporate control : A study of defensive adjustments in asset and ownership structure," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 87-127, January.
    4. Carpenter, Jennifer N., 1998. "The exercise and valuation of executive stock options," Journal of Financial Economics, Elsevier, vol. 48(2), pages 127-158, May.
    5. Mehran, Hamid, 1995. "Executive compensation structure, ownership, and firm performance," Journal of Financial Economics, Elsevier, vol. 38(2), pages 163-184, 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. Coles, Jeffrey L. & Lemmon, Michael L. & Felix Meschke, J., 2012. "Structural models and endogeneity in corporate finance: The link between managerial ownership and corporate performance," Journal of Financial Economics, Elsevier, vol. 103(1), pages 149-168.
    2. Rosenberg, Matts, 2003. "Stock Option Compensation in Finland: An Analysis of Economic Determinants, Contracting Frequency, and Design," Working Papers 496, Hanken School of Economics.
    3. Brian J. Hall, 2003. "Six Challenges in Designing Equity-Based Pay," NBER Working Papers 9887, National Bureau of Economic Research, Inc.
    4. Menachem Abudy & Simon Benninga, 2011. "Taxation and the value of employee stock options," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 7(1), pages 9-37, February.
    5. Brian J. Hall & Thomas A. Knox, 2002. "Managing Option Fragility," NBER Working Papers 9059, National Bureau of Economic Research, Inc.
    6. Jin, Li & Kothari, S.P., 2008. "Effect of personal taxes on managers' decisions to sell their stock," Journal of Accounting and Economics, Elsevier, vol. 46(1), pages 23-46, September.
    7. Vicky Henderson, 2005. "The impact of the market portfolio on the valuation, incentives and optimality of executive stock options," Quantitative Finance, Taylor & Francis Journals, vol. 5(1), pages 35-47.
    8. Dee, Carol Callaway & Lulseged, Ayalew & Nowlin, Tanya S., 2005. "Executive compensation and risk: The case of internet firms," Journal of Corporate Finance, Elsevier, vol. 12(1), pages 80-96, December.
    9. Carola Frydman & Dirk Jenter, 2010. "CEO Compensation," Annual Review of Financial Economics, Annual Reviews, vol. 2(1), pages 75-102, December.
    10. Brian J. Hall & Thomas A. Knox, 2004. "Underwater Options and the Dynamics of Executive Pay‐to‐Performance Sensitivities," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 42(2), pages 365-412, May.
    11. Manika Kohli, 2018. "Impact of Ownership Type and Board Characteristics on the Pay–Performance Relationship: Evidence from India," Indian Journal of Corporate Governance, , vol. 11(1), pages 1-34, June.
    12. repec:eee:labchp:v:3:y:1999:i:pb:p:2485-2563 is not listed on IDEAS
    13. Duan, Jin-Chuan & Wei, Jason, 2005. "Executive stock options and incentive effects due to systematic risk," Journal of Banking & Finance, Elsevier, vol. 29(5), pages 1185-1211, May.
    14. Ke, Bin & Petroni, Kathy & Safieddine, Assem, 1999. "Ownership concentration and sensitivity of executive pay to accounting performance measures: Evidence from publicly and privately-held insurance companies," Journal of Accounting and Economics, Elsevier, vol. 28(2), pages 185-209, December.
    15. Chang, Charles & Fuh, Cheng-Der & Hsu, Ya-Hui, 2008. "ESO compensation: The roles of default risk, employee sentiment, and insider information," Journal of Corporate Finance, Elsevier, vol. 14(5), pages 630-641, December.
    16. Jenter, Dirk, 2004. "Executive Compensation, Incentives, and Risk," Working papers 4466-02, Massachusetts Institute of Technology (MIT), Sloan School of Management.
    17. Rüdiger Fahlenbrach, 2009. "Shareholder Rights, Boards, and CEO Compensation," Review of Finance, European Finance Association, vol. 13(1), pages 81-113.
    18. Tian, Yisong S., 2004. "Too much of a good incentive? The case of executive stock options," Journal of Banking & Finance, Elsevier, vol. 28(6), pages 1225-1245, June.
    19. Anja Tuschke, 2002. "Aktienbasierte Entlohnung zur Bewerberauswahl am Arbeitsmarkt für Führungskräfte," Schmalenbach Journal of Business Research, Springer, vol. 54(1), pages 46-63, February.
    20. Liljeblom, Eva & Pasternack, Daniel & Rosenberg, Matts, 2011. "What determines stock option contract design?," Journal of Financial Economics, Elsevier, vol. 102(2), pages 293-316.
    21. Harjeet S. Bhabra & Ashrafee T. Hossain, 2018. "Does location influence executive compensation? Evidence from Canadian SMEs," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 22(1), pages 89-109, March.

    More about this item

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

    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:spr:jecfin:v:28:y:2004:i:2:p:270-284. 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: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    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.