Insider Trading and Pay Performance Sensitivity: An Empirical Analysis

33 Pages Posted: 26 Dec 2005

See all articles by Wei Zhang

Wei Zhang

SUNY at Albany

Steven F. Cahan

University of Auckland Business School

Arthur C. Allen

Univ. of Nebraska - Lincoln

Date Written: 2006-06

Abstract

We examine whether the sensitivity of pay to performance is associated with the amount of insider trading that managers undertake. Because insider trading profits represent an alternative form of compensation, we expect that firms will consider the compensation component provided by insider trading when designing remuneration contracts. Employing a proxy for insider trading that captures the degree to which managers trade on private information, we find evidence that an increased (a decreased) level of insider trading is associated with a decreased (an increased) pay performance sensitivity.

Keywords: insider trading, pay-performance sensitivity, incentives, compensation, private information

Suggested Citation

Zhang, Wei and Cahan, Steven F. and Allen, Arthur C., Insider Trading and Pay Performance Sensitivity: An Empirical Analysis (2006-06). Journal of Business Finance & Accounting, Vol. 32, No. 9-10, pp. 1887-1919, November 2005, Available at SSRN: https://ssrn.com/abstract=857615 or http://dx.doi.org/10.1111/j.1468-5957.2006.00651.x

Wei Zhang

SUNY at Albany ( email )

School of Business
Department of Accounting and Law
Albany, NY 12222
United States

Steven F. Cahan (Contact Author)

University of Auckland Business School ( email )

12 Grafton Rd
Private Bag 92019
Auckland, 1010
New Zealand

Arthur C. Allen

Univ. of Nebraska - Lincoln ( email )

730 N. 14th St.
445J College of Business
Lincoln, NE 68588-0488
United States

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