Broker-Dealers as Gatekeepers: Evidence from Insider Stock Gifts

Abstract

We study how financial intermediaries can constrain managerial self-dealing. Following enhanced oversight of broker-dealers beginning in 2009, we document a decline in the backdating of executive stock gifts, a practice that inflated tax deductions. Treatment effects translate to an estimated $100,000 in lost tax benefits per executive per year and are concentrated among broker-dealers with weaker internal controls before the regulatory shift, those offering investment advice and financial planning services, and those with a history of misconduct. Our findings demonstrate that intermediary oversight can serve as an external governance mechanism complementing the direct regulation of corporate insiders.

Keywords: PCAOB, Dodd-Frank, investor protection, Tax Evasion, misconduct

JEL Classification: G14, G18, G28, K22, M42