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Does regulating executive compensation impact insider trading?

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  • Chen, Yanyan
  • Tian, Gary Gang
  • Yao, Daifei Troy

Abstract

We examine whether equity incentive regulations help to reduce managerial incentives for manipulating earnings to gain trading advantages over shareholders. Using a sample of trading records for Chinese listed firms between 2006 and 2016, we find evidence that equity incentives reduce the positive association between insider trading and earnings management. In addition, we find that the impact of equity incentives on this association is more pronounced in state-owned enterprises (SOEs). Furthermore, we find that China's regulatory ban on the granting of equity to insiders with large shareholdings reduces the positive relation between insider selling and earnings management. Our additional tests provide strong evidence that regulatory requirements concerning the vesting conditions are negatively associated with managerial opportunistic behavior. Altogether, our results provide strong support for amendments to strengthen regulations on equity incentives in countries where overall corporate governance is weaker.

Suggested Citation

  • Chen, Yanyan & Tian, Gary Gang & Yao, Daifei Troy, 2019. "Does regulating executive compensation impact insider trading?," Pacific-Basin Finance Journal, Elsevier, vol. 56(C), pages 1-20.
    • Handle: RePEc:eee:pacfin:v:56:y:2019:i:c:p:1-20
    DOI: 10.1016/j.pacfin.2019.05.004
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    References listed on IDEAS

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    Cited by:

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    3. Mazza, Paolo & Wang, Shiyu, 2021. "Corporate legal insider trading in China: Performance and determinants," International Review of Law and Economics, Elsevier, vol. 68(C).
    4. Zhu, Chunhui & Zhang, Teng & Li, Shaoyu, 2021. "Why more restricted stocks, less stock options?--An explanation based on the preference of regulators of China?," Journal of Asian Economics, Elsevier, vol. 77(C).

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    More about this item

    Keywords

    Regulation; Equity incentives; Insider trading; Earnings management;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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