Insider Trading in Derivative Securities: An Empirical Examination of the Use of Zero-Cost Collars and Equity Swaps by Corporate Insiders

43 Pages Posted: 23 Jun 1999

See all articles by J. Carr Bettis

J. Carr Bettis

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

Michael L. Lemmon

University of Utah - Department of Finance

John M. Bizjak

Texas Christian University

Date Written: May 31, 1999

Abstract

We provide an examination of the use of zero-cost collars and equity swaps by corporate insiders to hedge the risk associated with their personal holdings in the company's equity. These financial instruments have important implications for insider trading and incentive-based contracts. Our analysis indicates that these transactions generally involve high ranking insiders (CEOs, board members and senior executives) and cover over a third of their equity holdings. We also find that insiders appear to initiate hedging transactions immediately following large price runups, prior to increases in stock price volatility, and prior to poor earnings announcements. In addition, abnormal returns following insider hedging activities are more negative than those associated with ordinary insider sales. Overall, the evidence indicates that executives can use these hedging instruments to significantly alter their effective ownership positions in the firm.

JEL Classification: G30, G34, K22

Suggested Citation

Bettis, J. Carr and Lemmon, Michael L. and Bizjak, John M., Insider Trading in Derivative Securities: An Empirical Examination of the Use of Zero-Cost Collars and Equity Swaps by Corporate Insiders (May 31, 1999). Available at SSRN: https://ssrn.com/abstract=167189 or http://dx.doi.org/10.2139/ssrn.167189

J. Carr Bettis (Contact Author)

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

Michael L. Lemmon

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States
801-585-5210 (Phone)
801-581-7214 (Fax)

John M. Bizjak

Texas Christian University ( email )

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

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