Why Do Insiders Hedge Their Ownership? An Empirical Examination

55 Pages Posted: 25 Mar 2009 Last revised: 19 Jun 2013

See all articles by J. Carr Bettis

J. Carr Bettis

Arizona State University (ASU) - Finance Department; Fathom Lab; Verus Analytics, Inc

John M. Bizjak

Texas Christian University

Swaminathan L. Kalpathy

Texas Christian University - M.J. Neeley School of Business

Date Written: June 18, 2013

Abstract

We study derivative instruments that corporate insiders use to diversify and hedge their equity ownership. Our evidence suggests that boards might allow use of these instruments in order to mitigate agency costs associated with overvalued equity and high equity-based pay. These instruments are more likely to be used in place of equity sales when there is greater litigation risk and closer monitoring by the market. Zero-cost collars and variable forwards appear to be timed prior to poor performance. Exchange funds appear to be primarily used for diversification and are associated with higher personal tax rates and closer investment banking ties.

Keywords: Executive compensation, stock awards, stock options, CEO pay, insider ownership, corporate governance, derivative securities, hedging

JEL Classification: G13, G32, G34, J33, M12, M52, M55

Suggested Citation

Bettis, J. Carr and Bizjak, John M. and Kalpathy, Swaminathan L., Why Do Insiders Hedge Their Ownership? An Empirical Examination (June 18, 2013). Available at SSRN: https://ssrn.com/abstract=1364810 or http://dx.doi.org/10.2139/ssrn.1364810

J. Carr Bettis

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

Fathom Lab ( email )

16211 N. Scottsdale Rd
#A6A-628
Scottsdale, AZ 85254
United States

Verus Analytics, Inc ( email )

15210 N Scottsdale Rd
Suite 250
Scottsdale, AZ 85254
United States

John M. Bizjak (Contact Author)

Texas Christian University ( email )

Fort Worth, TX 76129
United States
817-257-4260 (Phone)

Swaminathan L. Kalpathy

Texas Christian University - M.J. Neeley School of Business ( email )

Fort Worth, TX 76129
United States

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