Friday, April 23, 2021
Sureyya Burcu Avci (Sabanci University; Google Scholar), Cindy A. Schipani (Michigan; Google Scholar), H. Nejat Seyhun (Michigan; Google Scholar) & Andrew Verstein (UCLA; Google Scholar), Insider Giving, 71 Duke L.J. ___ (2021):
Corporate insiders can avoid losses if they dispose of their stock while in possession of material, non-public information. One means of disposal, selling the stock, is illegal and subject to prompt mandatory reporting. A second strategy is almost as effective and it faces lax reporting requirements and legal restrictions. That second method is to donate the stock to a charity and take a charitable tax deduction at the inflated stock price. “Insider giving” is a potent substitute for insider trading. We show that insider giving is far more widespread than previously believed.
In particular, we show that it is not limited to officers and directors. Large investors appear to regularly receive material non-public information and use it to avoid losses. Using a vast dataset of essentially all transactions in public company stock since 1986, we find consistent and economically significant evidence that these shareholders’ impeccable timing likely reflects information leakage. We also document substantial evidence of backdating — investors falsifying the date of their gift to capture a larger tax break. We show why lax reporting and enforcement encourage insider giving, explain why insider giving represents a policy failure, and highlight the theoretical implications of these findings to broader corporate, securities, and tax debates.