Get the Money Somehow: The Effect of Missing Performance Goals on Insider Trading

Abstract

This paper uses a regression discontinuity design to identify the effect of missing relative performance goals on insider trading. I find that CEOs who narrowly miss relative performance goals and hence receive a lower pay earn higher profits from their insider trades subsequent to the compensation shock than otherwise similar CEOs who narrowly beat the goals. I also find that CEOs who narrowly miss relative performance goals become less likely to provide earnings and sales guidance. These results suggest that managers can use insider trading to make up for the loss in compensation due to missing relative performance goals, which could reduce the incentive effect of performance-based pay.

Keywords: Performance-based pay, executive compensation, insider trading, regression discontinuity

JEL Classification: G34, G14