Why Do Insiders Hedge Their Ownership? An Empirical Examination

We examine different types of derivative instruments used by corporate insiders. These instruments are more likely to be used when there is greater insider ownership and greater capital market scrutiny. While these instruments may be allowed by boards to mitigate agency problems relating to overvalued equity and high equity-based pay, our evidence regarding forwards and collars is more consistent with the strategic timing of transactions by insiders. Exchange funds appear to be primarily used for diversification and are associated with higher personal tax rates. Collectively, our results suggest that there is significant heterogeneity in the motivation to use these instruments.