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

65 Pages Posted: 16 Dec 2019 Last revised: 29 Sep 2022

See all articles by Meng Gao

Meng Gao

University of Connecticut - Department of Finance

Date Written: September 28, 2022

Abstract

This paper uses a regression discontinuity design to identify the effect of compensation shocks on insider trading. I find that CEOs who narrowly miss relative performance goals and hence suffer a loss in compensation subsequently earn higher abnormal profits from their insider trades 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: J33, G34, G14, M41

Suggested Citation

Gao, Meng, Get the Money Somehow: The Effect of Missing Performance Goals on Insider Trading (September 28, 2022). Available at SSRN: https://ssrn.com/abstract=3495199 or http://dx.doi.org/10.2139/ssrn.3495199

Meng Gao (Contact Author)

University of Connecticut - Department of Finance ( email )

Storrs, CT 06269
United States

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