Manager's opportunistic trading of their firms' shares: a case study of executives in the banking industry
Providing managers with stock in the firm may help ensure that managers act in the shareholders' interest. The level of managerial stock ownership, however, is not generally controlled by the firm's compensation committee. Rather, managers themselves determine the level of their stock holdings. To date, though, little evidence exists on managers' personal transactions and how these trades affect their overall equity holdings. This analysis provides insight on the trading practices of bank managers. ; I find that managers do not rely solely on the actions of a compensation committee to set their stock holdings. The assumption that managerial stock holdings are determined solely by the firm's compensation committee is shown to be inaccurate. I provide evidence that managerial open market purchases and sales are both primary determinants of the level of managerial stock holdings. I also show that managers alter their holdings in an opportunistic manner. In general, managers alter their stock holdings when their firm's prospects change. Managers consistently take advantage of private firm-specific information, earning positive abnormal returns on open market purchases while avoiding negative abnormal returns by making open market sales. ; Evidence suggests that opportunistic trading is most prevalent among managers who face the greatest exposure to their firm's nonsystematic risk. In general, managers appear to "fine tune" the proportion of their wealth that is sensitive to changes in firm value. In effect, this trading increases the rate of return and reduces the riskiness of holding those shares. This increased return/risk trade-off, available to managers who trade shares in their firms, may help explain why many managers are willing to hold what appears to be an undiversified stake in their firm.
|Date of creation:||1997|
|Date of revision:|
|Publication status:||Published in Financial Management (Winter 1999)|
|Contact details of provider:|| Postal: 600 Atlantic Avenue, Boston, Massachusetts 02210|
Web page: http://www.bos.frb.org/
More information through EDIRC
|Order Information:|| Email: |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Seyhun, H Nejat, 1992. "The Effectiveness of the Insider-Trading Sanctions," Journal of Law and Economics, University of Chicago Press, vol. 35(1), pages 149-82, April.
- R. Glenn Hubbard & Darius Palia, 1994.
"Executive Pay and Performance: Evidence from the U.S. Banking Industry,"
NBER Working Papers
4704, National Bureau of Economic Research, Inc.
- Hubbard, R. Glenn & Palia, Darius, 1995. "Executive pay and performance Evidence from the U.S. banking industry," Journal of Financial Economics, Elsevier, vol. 39(1), pages 105-130, September.
- Keeley, Michael C, 1990. "Deposit Insurance, Risk, and Market Power in Banking," American Economic Review, American Economic Association, vol. 80(5), pages 1183-1200, December.
- Scholes, Myron & Williams, Joseph, 1977. "Estimating betas from nonsynchronous data," Journal of Financial Economics, Elsevier, vol. 5(3), pages 309-327, December.
- Flannery, Mark J & James, Christopher M, 1984. " The Effect of Interest Rate Changes on the Common Stock Returns of Financial Institutions," Journal of Finance, American Finance Association, vol. 39(4), pages 1141-53, September.
- Benston, George J., 1985. "The self-serving management hypothesis : Some evidence," Journal of Accounting and Economics, Elsevier, vol. 7(1-3), pages 67-84, April.
- 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(01), pages 1-14, March.
- David Yermack, 1996.
"Good Timing: CEO Stock Option Awards and Company News Announcements,"
New York University, Leonard N. Stern School Finance Department Working Paper Seires
96-41, New York University, Leonard N. Stern School of Business-.
- Yermack, David, 1997. " Good Timing: CEO Stock Option Awards and Company News Announcements," Journal of Finance, American Finance Association, vol. 52(2), pages 449-76, June.
- Ronn, Ehud I & Verma, Avinash K, 1986. " Pricing Risk-Adjusted Deposit Insurance: An Option-Based Model," Journal of Finance, American Finance Association, vol. 41(4), pages 871-95, September.
- Jaffe, Jeffrey F, 1974. "Special Information and Insider Trading," The Journal of Business, University of Chicago Press, vol. 47(3), pages 410-28, July.
- Edward J. Kane, 1985. "The Gathering Crisis in Federal Deposit Insurance," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262611856, March.
- Crawford, Anthony J & Ezzell, John R & Miles, James A, 1995. "Bank CEO Pay-Performance Relations and the Effects of Deregulation," The Journal of Business, University of Chicago Press, vol. 68(2), pages 231-56, April.
- Seyhun, H. Nejat, 1986. "Insiders' profits, costs of trading, and market efficiency," Journal of Financial Economics, Elsevier, vol. 16(2), pages 189-212, June.
- Rozeff, Michael S & Zaman, Mir A, 1988. "Market Efficiency and Insider Trading: New Evidence," The Journal of Business, University of Chicago Press, vol. 61(1), pages 25-44, January.
- Merton, Robert C., 1977. "An analytic derivation of the cost of deposit insurance and loan guarantees An application of modern option pricing theory," Journal of Banking & Finance, Elsevier, vol. 1(1), pages 3-11, June.
- Edward J. Kane & Haluk Unal, 1988. "Change in Market Assessments of Deposit-Institution Riskiness," NBER Working Papers 2530, National Bureau of Economic Research, Inc.
- Murphy, Kevin J., 1985. "Corporate performance and managerial remuneration : An empirical analysis," Journal of Accounting and Economics, Elsevier, vol. 7(1-3), pages 11-42, April.
- Demsetz, Harold & Lehn, Kenneth, 1985. "The Structure of Corporate Ownership: Causes and Consequences," Journal of Political Economy, University of Chicago Press, vol. 93(6), pages 1155-77, December.
- Buser, Stephen A & Chen, Andrew H & Kane, Edward J, 1981. "Federal Deposit Insurance, Regulatory Policy, and Optimal Bank Capital," Journal of Finance, American Finance Association, vol. 36(1), pages 51-60, March.
- Brown, Stephen J. & Warner, Jerold B., 1985. "Using daily stock returns : The case of event studies," Journal of Financial Economics, Elsevier, vol. 14(1), pages 3-31, March.
- Fama, Eugene F, 1980. "Agency Problems and the Theory of the Firm," Journal of Political Economy, University of Chicago Press, vol. 88(2), pages 288-307, April.
- Marcus, Alan J & Shaked, Israel, 1984. "The Valuation of FDIC Deposit Insurance Using Option-pricing Estimates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(4), pages 446-60, November.
- Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
- Houston, Joel F. & James, Christopher, 1995. "CEO compensation and bank risk Is compensation in banking structured to promote risk taking?," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 405-431, November.
- Saunders, Anthony & Strock, Elizabeth & Travlos, Nickolaos G, 1990. " Ownership Structure, Deregulation, and Bank Risk Taking," Journal of Finance, American Finance Association, vol. 45(2), pages 643-54, June.
When requesting a correction, please mention this item's handle: RePEc:fip:fedbwp:97-4. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Catherine Spozio)
If references are entirely missing, you can add them using this form.