Firm Performance and Compensation-Based Stock Trading by Corporate Executives

Zahid Iqbal
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Zahid Iqbal: Texas Southern University, USA

Chapter 2 in Advances in Quantitative Analysis of Finance and Accounting, 2006, pp 37-58 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractMany firms increase equity-based compensation during poor performance to strengthen managerial incentives. Increasing equity-based compensation may, however, trigger stock selling by high-ownership executives who diversify their investment portfolios. In this study, we examine whether such compensation-based stock sales depend on a firm's financial performance. Our findings show that executives do not sell stock in response to stock option awards during declining earnings. This is true even for the high ownership executives. These findings suggest that increasing equity-based compensation during poor performance seems to achieve the incentive-alignment goal for the managers. Our findings show that the high ownership managers sell shares for diversification only when the firm's earnings are rising.

Keywords: Earnings Management; Management Compensation; Option Theory and Application; Debt Management and Interest Rate Theory; Portfolio Diversification; Earnings Surprise (search for similar items in EconPapers)
Date: 2006
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