Executive Compensation, Individual-Level Tax Rates, and Insider Trading Profits

55 Pages Posted: 15 Sep 2020 Last revised: 1 Dec 2020

See all articles by Nathan C. Goldman

Nathan C. Goldman

North Carolina State University - Department of Accounting

N. Bugra Ozel

University of Texas at Dallas; The Wharton School

Date Written: August 1, 2020

Abstract

We consider insider trading profitability as a means for executives to shift the impact of changes in individual-level tax rates to shareholders. Consistent with predictions from an analytical model, we document a positive association between abnormal insider trading profitability and changes in income tax rates at the federal and state level. We estimate that the changes in insider trading profitability offset between 12% and 16% of the effect of tax rate changes on net compensation for an average executive. We predict and find that several factors moderate this relation. We conclude that executives pass a portion of the tax effects onto shareholders through insider trading profits.

Keywords: insider trading; executive compensation; individual-level taxes

JEL Classification: H24; H31; J33; M12

Suggested Citation

Goldman, Nathan C. and Ozel, N. Bugra, Executive Compensation, Individual-Level Tax Rates, and Insider Trading Profits (August 1, 2020). Available at SSRN: https://ssrn.com/abstract=3670969 or http://dx.doi.org/10.2139/ssrn.3670969

Nathan C. Goldman (Contact Author)

North Carolina State University - Department of Accounting ( email )

Raleigh, NC 27695-8113
United States

N. Bugra Ozel

University of Texas at Dallas ( email )

800 W Campbell Rd
Richardson, TX 75083-0688
United States

HOME PAGE: http://sites.google.com/view/bugraozel/home

The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

HOME PAGE: http://sites.google.com/view/bugraozel/home

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