Insider Trading and Pay-Performance Sensitivity: An Empirical Analysis

Authors

  • Wei Zhang,

  • Steven F. Cahan,

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  • Arthur C. Allen

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    • The authors are respectively from the School of Business, Clarkson University, New York; the University of Aukland Business School, New Zealand; and the College of Business, University of Nebraska-Lincoln, USA. (Paper received July 2003, revised and accepted November 2004)


Steven F. Cahan, University of Auckland Business School, Private Bag 92019, Auckland, New Zealand.
e-mail: s.cahan@auckland.ac.nz

Abstract

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.

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