Information, Incentive Alignment and Company-Loan Financing of Insider Trades

39 Pages Posted: 12 Sep 2005

See all articles by Jon A. Garfinkel

Jon A. Garfinkel

University of Iowa - Tippie College of Business

Kathleen M. Kahle

University of Arizona - Department of Finance; European Corporate Governance Institute (ECGI)

Kuldeep Shastri

University of Pittsburgh - Finance Group

Date Written: June 30, 2006

Abstract

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

Garfinkel, Jon A. and Kahle, Kathleen M. and Shastri, Kuldeep, Information, Incentive Alignment and Company-Loan Financing of Insider Trades (June 30, 2006). Available at SSRN: https://ssrn.com/abstract=796208 or http://dx.doi.org/10.2139/ssrn.796208

Jon A. Garfinkel (Contact Author)

University of Iowa - Tippie College of Business ( email )

108 PBB
Iowa City, IA 52242-1000
United States
319-335-0943 (Phone)
319-335-3690 (Fax)

HOME PAGE: http://www.biz.uiowa.edu/faculty/jgarfinkel

Kathleen M. Kahle

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
520-621-7489 (Phone)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Kuldeep Shastri

University of Pittsburgh - Finance Group ( email )

372 Mervis Hall
Pittsburgh, PA 15260
United States
412-648-1708 (Phone)
412-648-1693 (Fax)

HOME PAGE: http://www.pitt.edu/~ks112354

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