Effect of Personal Taxes on Managers' Decision to Sell Unrestricted Equity

Abstract

We examine how personal taxes affect CEOs' decision to sell their vested equity and compare it against diversification, managerial overconfidence and other determinants of CEOs' sale of equity. While CEOs frequently sell large amounts of their unrestricted firm equity, we find that the tax burden associated with the sale deters CEOs from selling their equity. The effect of taxes remains significant even after controlling for other determinants of CEOs' sale of equity. We also find that taxable institutional investors and CEOs both respond to taxes in their selling of equity, although the CEOs appear to be less tax-sensitive. Other determinants affect CEOs' selling decisions largely as predicted in the existing literature.

Keywords: Executive Compensation, Taxation, Overconfidence, Behavioral Finance, Institutional investors

JEL Classification: G32, M41, M52, J33, J44, H24