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Managerial Ownership, Incentive Contracting, and the Use of Zero-Cost Collars and Equity Swaps by Corporate Insiders

Published online by Cambridge University Press:  06 April 2009

J. Carr Bettis ,
John M. Bizjak  and
Michael L. Lemmon
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Abstract

Zero-cost collars and equity swaps provide insiders with the opportunity to hedge the risk associated with their personal holdings in the company's equity. Consequently, their use has important implications for incentive-based contracting and for understanding insider trading behavior. Our analysis indicates that these transactions generally involve high-ranking insiders and effectively reduce their ownership by about 25%, on average. Given the potential of these financial instruments to substantially alter the incentive alignment between managers and shareholders, we suggest that increasing the transparency of these transactions may provide valuable information to investors.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 36 , Issue 3 , September 2001 , pp. 345 - 370
Copyright
Copyright © School of Business Administration, University of Washington 2001

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