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

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  • 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
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    References listed on IDEAS

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    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.
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    4. Mehran, Hamid, 1995. "Executive compensation structure, ownership, and firm performance," Journal of Financial Economics, Elsevier, vol. 38(2), pages 163-184, June.
    5. Carpenter, Jennifer N., 1998. "The exercise and valuation of executive stock options," Journal of Financial Economics, Elsevier, vol. 48(2), pages 127-158, May.
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    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

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