Abstract

http://ssrn.com/abstract=816945
 
 

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An Analysis of Insiders' Use of Prepaid Variable Forward Transactions


Alan D. Jagolinzer


University of Colorado - Leeds School of Business

P. Eric Yeung


Cornell University - Samuel Curtis Johnson Graduate School of Management

Steven R. Matsunaga


University of Oregon

May 2007


Abstract:     
This study examines firm performance surrounding insiders' Prepaid Variable Forward (PVF) transactions to infer insiders' information when they enter these off-market contracts. PVFs allow insiders to hedge downside risk, share performance gains, and obtain immediate large-sum cash payments for investment or consumption. On average, PVF transactions cover 30% of a sample insider's firm-specific wealth ($22 million), which is substantially larger than a typical open-market sale. PVFs systematically follow strong firm performance and precede degraded stock and earnings performance. PVFs also precede periods of negative abnormal returns relative to potential alternative investments. The documented association between PVFs and performance declines does not appear to result from the market's response to transaction disclosure, participant self-selection, or general price reversals. Thus, evidence suggests that insiders use PVFs to diversify firm-specific holdings in anticipation of performance declines.

Number of Pages in PDF File: 37

Keywords: hedge, derivative, management incentives, insider trading, forward sale

JEL Classification: G18, M41, K22

working papers series


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Date posted: October 1, 2005  

Suggested Citation

Jagolinzer, Alan D. and Yeung, P. Eric and Matsunaga, Steven R., An Analysis of Insiders' Use of Prepaid Variable Forward Transactions (May 2007). Available at SSRN: http://ssrn.com/abstract=816945 or http://dx.doi.org/10.2139/ssrn.816945

Contact Information

Alan D. Jagolinzer
University of Colorado - Leeds School of Business ( email )
419 UCB
Boulder, CO 80309-0419
United States
P. Eric Yeung (Contact Author)
Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )
Ithaca, NY 14853
United States
Steven R. Matsunaga
University of Oregon ( email )
Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
United States
503-346-3340 (Phone)
503-346-3341 (Fax)
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