The Relation between Insider-Trading Restrictions and Executive Compensation

Posted: 18 Jul 2003

See all articles by Darren T. Roulstone

Darren T. Roulstone

Ohio State University (OSU) - Fisher College of Business

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.

Keywords: insider trading, executive compensation, contracting

JEL Classification: G30, J33

Suggested Citation

Roulstone, Darren T., The Relation between Insider-Trading Restrictions and Executive Compensation. Available at SSRN: https://ssrn.com/abstract=411820

Darren T. Roulstone (Contact Author)

Ohio State University (OSU) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

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