On the Irrelevance of Insider Trading for Managerial Compensation

34 Pages Posted: 23 Mar 2009

Date Written: March 20, 2009

Abstract

We examine changes in the compensation of CEOs of German firms after the prohibition of insider trading (IT) in 1994 to test whether IT is a relevant compensation device. While we find that the performance elasticity of explicit CEO pay slightly increases subsequent to the IT law adoption for non-financial firms indicating an incentive-substitution effect, the overall change in levels seems modest. We explore the hypothesis that compensation for forgone IT profits in general is small because typically, firms lack at least one of the two necessary conditions for profitable IT: the existence of a liquid stock market imposing low costs of transactions and the presence of a small number of co-insiders, preventing the information rent to be competed away. Based on a difference-in-difference estimation, we indeed find that explicit pay increases more strongly for intensely traded firms and decreases for non-financial firms and insurances with a higher number of co-insiders. The combined effect is relatively small except for firms with the most liquid shares.

Keywords: insider trading, liquidity, board size

JEL Classification: G38, K22

Suggested Citation

Brenner, Steffen, On the Irrelevance of Insider Trading for Managerial Compensation (March 20, 2009). Available at SSRN: https://ssrn.com/abstract=1366302 or http://dx.doi.org/10.2139/ssrn.1366302

Steffen Brenner (Contact Author)

Copenhagen Business School

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

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