Information, Incentive Alignment and Company-Loan Financing of Insider Trades
39 Pages Posted: 12 Sep 2005
Date Written: June 30, 2006
Insider acquisitions of shares are supposed to align the interests of managers and shareholders. Thus, they are typically viewed as positive signals. However, if the transactions do not put insiders' wealth at risk, perhaps this conclusion is a bit premature. We focus on loan financing of insider share acquisitions to test this idea. Our results indicate that loan financed insider purchases and option exercises earn smaller profits than non loan-financed counterparts. Our results also suggest that loan-financed insider purchases are an additional method to move an executive quickly to a target level of incentives. Based on these results, we conclude that (a) not all insider trades are alike, (b) insiders recognize when they are "playing with other people's money," and (c) loan-financed purchases play an important role in incentive alignment.
Keywords: Executive Loans, Insider Trading, Option Exercise
JEL Classification: G32, G34, G38
Suggested Citation: Suggested Citation