Tax-favored Stock Donations by Corporate Insiders and Consequences for Equity Markets

Management Science, forthcoming

28 Pages Posted: 10 Jan 2022 Last revised: 25 Jul 2022

See all articles by Anil Arya

Anil Arya

Ohio State University (OSU) - Fisher College of Business

Brian Mittendorf

Ohio State University (OSU) - Fisher College of Business

Ram Ramanan

SUNY at Binghamton - School of Management; Indian School of Business

Date Written: July 23, 2022

Abstract

Though corporate insiders face substantial restrictions on stock sales, securing tax deductions
through charitable donations of stock is viewed as an attractive alternative. Recent press coverage
and growing empirical evidence confirm that insider donations occur frequently and often precede
stock price drops. Securities regulators have also taken note, with a recent push for new rules to
require rapid disclosure as with insider trades. This paper develops a model of informed stock
trading when disposal of stock by insiders takes the form of tax-favored charitable donations rather
than direct trading. We demonstrate that charitable gifts by insiders can reflect nonpublic
information about firm value, and that they do so in a manner that promotes greater market
efficiency. Relative to informed trading, insider donations yield greater market liquidity, more
efficient equity prices, and superior investor protection. The results suggest that while insider
donations deserve scrutiny, they are not equivalent to insider trades. The results also provide a
general framework to examine implications of insider donations for tax policy governing
philanthropic behavior.

Keywords: Insider trading, Market efficiency, Philanthropy, Tax policy

JEL Classification: C72

Suggested Citation

Arya, Anil and Mittendorf, Brian and Ramanan, Ram, Tax-favored Stock Donations by Corporate Insiders and Consequences for Equity Markets (July 23, 2022). Management Science, forthcoming, Available at SSRN: https://ssrn.com/abstract=4003698 or http://dx.doi.org/10.2139/ssrn.4003698

Anil Arya

Ohio State University (OSU) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

Brian Mittendorf

Ohio State University (OSU) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

Ram Ramanan (Contact Author)

SUNY at Binghamton - School of Management ( email )

P.O. Box 6015
Binghamton, NY 13902-6015
United States

Indian School of Business ( email )

Gachibowli
Hyderabad, 500032
India

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