Invested in Vested Stock: Abnormal Returns on Retained Equity

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.