Invested in Vested Stock: Abnormal Returns on Retained Equity

45 Pages Posted: 17 Oct 2017 Last revised: 26 Mar 2018

Erik Johannesson

Columbia University - Columbia Business School

Seil Kim

Baruch College, City University of New York

Date Written: March 22, 2018

Abstract

We document new evidence that insiders retain vested equity to benefit from price appreciations. Our study focuses on restricted stock vesting events, through which insiders receive stock but face fewer reporting requirements and selling restrictions than if the stock had been purchased on the open market. Using a detailed dataset that tracks restricted stock vesting schedules, we find that insiders realize positive abnormal returns from retaining vested stock. Mimicking insiders’ trading patterns by buying on the vesting date and selling on the subsequent open-market sales date yields annualized five-factor abnormal returns of between 5.0% and 6.3%. Abnormal returns are considerably higher for insiders who use discretion in paying taxes associated with the vested shares and for insiders who retain shares over the subsequent earnings announcement, consistent with an informed holding explanation.

Suggested Citation

Johannesson, Erik and Kim, Seil, Invested in Vested Stock: Abnormal Returns on Retained Equity (March 22, 2018). Columbia Business School Research Paper No. 17-101. Available at SSRN: https://ssrn.com/abstract=3054071 or http://dx.doi.org/10.2139/ssrn.3054071

Erik Johannesson

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Seil Kim (Contact Author)

Baruch College, City University of New York ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States

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