Information, Insider Trading, Executive Reload Stock Options, Incentives, and Regulation

43 Pages Posted: 7 Feb 2019 Last revised: 24 May 2021

See all articles by David B. Colwell

David B. Colwell

UNSW Australia Business School, School of Banking and Finance; Financial Research Network (FIRN)

David Feldman

Banking and Finance, UNSW Business School, UNSW Sydney; Financial Research Network (FIRN)

Wei Hu

Department of Finance and Banking, Curtin University

Monique Pontier

Institut Mathématiques de Toulouse, Paul Sabatier University

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

Colwell, David B. and Feldman, David and Hu, Wei and Pontier, Monique, Information, Insider Trading, Executive Reload Stock Options, Incentives, and Regulation (September 1, 2020). Available at SSRN: https://ssrn.com/abstract=3329078 or http://dx.doi.org/10.2139/ssrn.3329078

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

Wei Hu

Department of Finance and Banking, Curtin University ( email )

Kent Street
Bentley
Perth, WA WA 6102
Australia

Monique Pontier

Institut Mathématiques de Toulouse, Paul Sabatier University ( email )

118 Route de Narbonne - Building 1R3
Toulouse Cedex 9, 31062
France

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