An Analysis of Insiders' Use of Prepaid Variable Forward Transactions

37 Pages Posted: 1 Oct 2005  

Alan D. Jagolinzer

University of Colorado - Leeds School of Business

P. Eric Yeung

Cornell University - Samuel Curtis Johnson Graduate School of Management

Steven R. Matsunaga

University of Oregon

Multiple version iconThere are 2 versions of this paper

Date Written: May 2007

Abstract

This study examines firm performance surrounding insiders' Prepaid Variable Forward (PVF) transactions to infer insiders' information when they enter these off-market contracts. PVFs allow insiders to hedge downside risk, share performance gains, and obtain immediate large-sum cash payments for investment or consumption. On average, PVF transactions cover 30% of a sample insider's firm-specific wealth ($22 million), which is substantially larger than a typical open-market sale. PVFs systematically follow strong firm performance and precede degraded stock and earnings performance. PVFs also precede periods of negative abnormal returns relative to potential alternative investments. The documented association between PVFs and performance declines does not appear to result from the market's response to transaction disclosure, participant self-selection, or general price reversals. Thus, evidence suggests that insiders use PVFs to diversify firm-specific holdings in anticipation of performance declines.

Keywords: hedge, derivative, management incentives, insider trading, forward sale

JEL Classification: G18, M41, K22

Suggested Citation

Jagolinzer, Alan D. and Yeung, P. Eric and Matsunaga, Steven R., An Analysis of Insiders' Use of Prepaid Variable Forward Transactions (May 2007). Available at SSRN: https://ssrn.com/abstract=816945 or http://dx.doi.org/10.2139/ssrn.816945

Alan D. Jagolinzer

University of Colorado - Leeds School of Business ( email )

419 UCB
Boulder, CO 80309-0419
United States

P. Eric Yeung (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

Steven R. Matsunaga

University of Oregon ( email )

Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
United States
503-346-3340 (Phone)
503-346-3341 (Fax)

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