Download This PaperInformation, Insider Trading, Executive Reload Stock Options, Incentives, and Regulation
43 Pages Posted: 7 Feb 2019 Last revised: 24 May 2021
Date Written: September 1, 2020
Abstract
We introduce a theoretical model of executives with insider information who receive executive stock options (ESOs) as incentives and optimize their “outside wealth” portfolios. We show that insider information nullifies ESO incentivizing, misaligning executives’ and shareholders’ interests. We offer realigning methods: granting executives with reload stock options (RSOs) while imposing a blackout trading period. Effective blackouts keep executives incentivized without over-restricting, i.e., reducing executives’ welfare below that of outsiders. We introduce RSO pricing for insider executives and offer policy implications: reestablishing the currently “out of favor” RSOs, allowing firms, not regulators, to set effective blackouts on securities they issue.
Keywords: Executive Stock Options, Insider Information, Constrained Portfolio Optimization, Non-Hedgeable, Non-Transferable, Reload, Enlarged Filtration
JEL Classification: G11, G13, C02, C61
Suggested Citation: Suggested Citation
David B. Colwell
UNSW Australia Business School, School of Banking and Finance ( email )
Sydney, NSW 2052
Australia
+61 (2) 9385 5851 (Phone)
+61 (2) 9385 6347 (Fax)
Financial Research Network (FIRN)
C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia
HOME PAGE: http://www.firn.org.au
David Feldman (Contact Author)
Banking and Finance, UNSW Business School, UNSW Sydney ( email )
UNSW Sydney, NSW 2052
Australia
+61 2 9385 5748 (Phone)
+61 2 9385 6347 (Fax)
Financial Research Network (FIRN)
C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia
HOME PAGE: http://www.firn.org.au