The Relation Between Insider-Trading Restrictions and Executive Compensation


  • This paper is based on my dissertation completed at the University of Michigan. I thank the members of my dissertation committee: Raffi Indjejikian (co-chair), Douglas Skinner (co-chair), Eugene Imhoff, E. Philip Howrey, and Tyler Shumway. Helpful comments and suggestions have been received from Ray Ball (the editor), two anonymous referees, Anne Beatty, Mark Bradshaw, Ilia Dichev, Troy Janes, Richard Lambert, Venky Nagar, D. J. Nanda, Joseph Piotroski, Abbie Smith, Earl Stice, and workshop participants at Brigham Young University, the University of California at Davis, the University of Chicago, Cornell University, Duke University, the University of Pennsylvania, the Pennsylvania State University, the University of Rochester, and the 2000 American Accounting Association annual meeting. All errors are my own. I gratefully acknowledge the financial support of the University of Michigan Business School, the William A. Paton Accounting Fund, the PricewaterhouseCoopers Foundation, and the Graduate School of Business at the University of Chicago.


In this study I investigate the relation between firm-level insider-trading restrictions and executive compensation. Using a trading-window proxy for the existence of such restrictions, I test predictions that insiders will demand compensation for these restrictions and that firms will need to increase incentives to restricted insiders. I find that firms that restrict insider trading pay a premium in total compensation relative to firms not restricting insider trading, after controlling for economic determinants of pay. Furthermore, these firms use more incentive-based compensation and their insiders hold larger equity incentives relative to firms that do not restrict insider trading. These results hold after controlling for the endogenous decision to restrict insiders and are consistent with the notion that insider trading plays a role in rewarding and motivating executives.