Say on Pay Laws and Insider Trading

We examine whether mandatory adoption of say on pay increases executives’ incentives to engage in insider trading to compensate for the negative impact of say on pay on the value of their explicit compensation packages. Our empirical design exploits the staggered adoption of say on pay laws across 1...

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Bibliographic Details
Published in:The Accounting review 2024-07, Vol.99 (4), p.83-110
Main Authors: Bourveau, Thomas, Brochet, Francois, Ferri, Fabrizio, Sun, Chengzhu
Format: Article
Language:English
Subjects:
Compensation
Executive compensation
Incentives
Insider trading
Profits
Raises
Risk management
Risk reduction
Sales
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Summary:We examine whether mandatory adoption of say on pay increases executives’ incentives to engage in insider trading to compensate for the negative impact of say on pay on the value of their explicit compensation packages. Our empirical design exploits the staggered adoption of say on pay laws across 14 countries over the 2000–2015 period. We find that mandatory adoption is associated with a material increase in insider trading profits, especially in firms where executive pay is most affected. The increase in insider trading profits is driven mostly by more frequent and larger profitable insider sales, consistent with executives’ desire to reduce their greater exposure to firm-specific risk while increasing their trading profits. Overall, our results highlight the importance of considering potential effects on insider trading incentives when designing compensation reforms and when assessing their effectiveness. Data Availability: All data used in the paper are available from cited public sources. JEL Classifications: G30; G34; G38; J33; K22; M12; M16.
ISSN:0001-4826
1558-7967
DOI:10.2308/TAR-2021-0596