Executive Deferral Plans and Insider Trading

35 Pages Posted: 12 May 2018

See all articles by Francesca Franco

Francesca Franco

London Business School

Oktay Urcan

University of Illinois at Urbana-Champaign

Date Written: April 30, 2018

Abstract

We study executive equity contributions to non-qualified deferred compensation plans, which consist in the election to defer part or all of the annual cash pay into the company’s stock. These transactions provide executives with an alternative channel to purchase shares in the firm while benefiting from a defence against illegal insider trading allegations. Using a large sample of executive deferrals over 2000-2014, we find evidence that executives use these transactions as a means to acquire the company’s stock during blackout windows. Consistent with the conjecture that deferrals benefit from lower litigation costs that inhibit insider trading before the release of corporate news, we also find that deferral amounts are significantly higher (lower) before the disclosure of good (bad) earnings news. Together, these results suggest that executives can use equity deferrals to circumvent Rule 10b5 restrictions and generate substantial returns by strategically selecting timing and content of corporate disclosures around these transactions.

Keywords: Deferred Compensation, Rule 10b5-1 Plans, Insider Trading

JEL Classification: J33, D84

Suggested Citation

Franco, Francesca and Urcan, Oktay, Executive Deferral Plans and Insider Trading (April 30, 2018). Available at SSRN: https://ssrn.com/abstract=3171042 or http://dx.doi.org/10.2139/ssrn.3171042

Francesca Franco

London Business School ( email )

Sussex Place
Regent's Park
London, NW1 4SA
United Kingdom

Oktay Urcan (Contact Author)

University of Illinois at Urbana-Champaign ( email )

515 E. Gregory Drive
4009 BIF MC-520
Champaign, IL 61820
United States
217-265-0383 (Phone)
217-244-0902 (Fax)

HOME PAGE: http://business.illinois.edu/profile/oktay-urcan/

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