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

52 Pages Posted: 16 Dec 2019 Last revised: 17 Jan 2020

See all articles by Meng Gao

Meng Gao

University of Illinois at Urbana-Champaign - Department of Finance

Date Written: January 10, 2020

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

Suggested Citation

Gao, Meng, Get the Money Somehow: The Effect of Missing Performance Goals on Insider Trading (January 10, 2020). Available at SSRN: https://ssrn.com/abstract=3495199 or http://dx.doi.org/10.2139/ssrn.3495199

Meng Gao (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

Champaign, IL
United States

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