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

Insider acquisitions of shares are supposed to align the interests of managers and shareholders. Thus, purchases are typically viewed as positive signals. However, if the transactions do not put insiders 'wealth at risk, perhaps this conclusion is premature. We test this idea by focusing on loa...

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Bibliographic Details
Published in:Financial management 2007-12, Vol.36 (4), p.67-87
Main Authors: Garfinkel, Jon A., Kahle, Kathleen, Shastri, Kuldeep
Format: Article
Language:English
Subjects:
Access to information
Acquired shares
Analysis
Asset acquisitions
Business structures
Commercial credit
Corporate debt
Corporate profits
Debt management
Evaluation
Financial incentives
Financial information
Financial management
Financial research
Financing methods
Hypotheses
Incentives
Insider dealing
Insider trading
Insider trading in securities
Investment analysis
Labor market
Loan financing
Loan servicing
Loans
Methods
Multivariate analysis
Open market sales
Open markets
Profitability
Purchasing
Stock purchases
Stock shares
Stockholders
Studies
Trade
U.S.A
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Summary:Insider acquisitions of shares are supposed to align the interests of managers and shareholders. Thus, purchases are typically viewed as positive signals. However, if the transactions do not put insiders 'wealth at risk, perhaps this conclusion is premature. We test this idea by focusing on loan financing of insider share acquisitions. We find that loan-financed insider purchases and option exercises earn lower profits than do counterparts that are not loan financed. Our results also suggest that loan-financed insider purchases are an additional method to move an executive quickly to a target level of incentives.
ISSN:0046-3892
1755-053X