Executive Deferral Plans and Insider Trading

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