An Analysis of Insiders' Use of Prepaid Variable Forward Transactions

25 Pages Posted: 11 Dec 2007  

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

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: 2007-04-22

Abstract

This study examines firm performance surrounding insiders&apos' prepaid variable forward (PVF) transactions to infer insiders&apos' 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&apos'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&apos'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.

Suggested Citation

Jagolinzer, Alan D. and Yeung, P. Eric and MATSUNAGA, STEVEN R., An Analysis of Insiders' Use of Prepaid Variable Forward Transactions (2007-04-22). Journal of Accounting Research, Vol. 45, Issue 5, pp. 1055-1079, December 2007. Available at SSRN: https://ssrn.com/abstract=1065893 or http://dx.doi.org/10.1111/j.1475-679X.2007.00260.x

Alan D. Jagolinzer (Contact Author)

University of Colorado - Leeds School of Business ( email )

419 UCB
Boulder, CO 80309-0419
United States

P. Eric Yeung

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

STEVEN R. MATSUNAGA

affiliation not provided to SSRN

No Address Available

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