Insider Trading Activity, Tenure Length, and Managerial Compensation
Posted: 17 Jan 2016
Date Written: November 1, 2012
In this study, insider trading activity is used as part of a managerial compensation structure. The wage structure changes with the tenure duration of the insider. Managers with shorter tenure rely more on insider profits as part of their compensation. On the other hand, managers with longer tenure execute insider transactions with lower profits. Different measurements of insider profits using calendar day returns of insider transactions, holding period returns for different horizons, or weighted average cumulative abnormal returns for the executive all lead to the same conclusion. The results are robust to various well-known empirical models, such as the CAPM model, Fama and French (1993) three factor model, or the Carhart (1997) four factor model. Insider trading profits have increased in recent years overall, especially after the Securities and Exchange Commission (SEC) implementation of Rule 10b5-1 in 2000. Therefore, the design of a wage schedule incorporating insider trading activity has become more relevant.
Keywords: Informed Trading, Managerial Compensation
JEL Classification: D82, G38, K22
Suggested Citation: Suggested Citation