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 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 such 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, Reference points and loss aversion J33

JEL Classification: J33, G34, G14, M52