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Insider Trading and Pay‐Performance Sensitivity: An Empirical Analysis
Author(s) -
Zhang Wei,
Cahan Steven F.,
Allen Arthur C.
Publication year - 2005
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/j.0306-686x.2005.00651.x
Subject(s) - insider trading , remuneration , insider , proxy (statistics) , business , compensation (psychology) , sensitivity (control systems) , information asymmetry , finance , computer science , psychology , machine learning , electronic engineering , political science , psychoanalysis , law , engineering
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.