Determinants and Trading Performance of Equity Deferrals by Corporate Outside Directors

Abstract

This study investigates the determinants and trading performance of outside directors’ equity deferrals, which represent the choice to convert part or all of their annual cash compensation into deferred company stock. Using a large sample of S&P1500 firms that allowed directors to defer their cash fees into equity between 1999 and 2009, we find significant associations between equity deferral choices and specific features of the director compensation plans, proxies for directors’ outside wealth diversification, and future firm stock market performance. Trading performance analyses indicate that outside directors earn substantial abnormal returns from their deferrals, with a significant proportion of the deferral transactions occurring during blackout periods. These results are consistent with companies structuring director equity deferral plans to circumvent SEC Rule 10b-5’s trading restrictions.

Keywords: outside directors; deferred compensation; insider trading; SEC Rule 10b-5 plans

JEL Classification: J33, D84