Managerial Ownership, Incentive Contracting and the Use of Zero-Cost Collars and Equity Swaps by Corporate Insiders

Posted: 14 Aug 2001

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

Abstract

Zero-cost collars and equity swaps provide insiders with the opportunity to hedge the risk associated with their personal holdings in the company's equity. Consequently their use has important implications for incentive-based contracting and for understanding insider-trading behavior. Our analysis indicates that these transactions generally involve high-ranking insiders, and effectively reduce their ownership by about 25% on average. Given the potential of these financial instruments to substantially alter the incentive alignment between managers and shareholders, we suggest that increasing the transparency of these transactions may provide valuable information to investors.

Suggested Citation

Bettis, J. Carr and Lemmon, Michael L. and Bizjak, John M., Managerial Ownership, Incentive Contracting and the Use of Zero-Cost Collars and Equity Swaps by Corporate Insiders. Journal of Financial and Quantitative Analysis, September 2001. Available at SSRN: https://ssrn.com/abstract=272295

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

Michael L. Lemmon (Contact Author)

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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