When corporate insiders learn about material, non-public bad news at their company that devalues stock prices, they can avoid losses by selling their stock before the public finds out. This form of “insider trading,” is, of course, illegal and risky. But selling stock is not the only way for corporate insiders to cash out. One alternative strategy, which is almost as financially effective and benefits from comparatively less onerous reporting requirements and legal restrictions, involves donating the stock to a charity and taking a tax deduction at the stock's inflated price. While a financial "second-best" strategy, "insider giving" nonetheless endures as a plausibly potent substitute for insider trading.
In Insider Giving, Sureyya B. Avci (Sabanci Univ.--Business) et al., submit their "insider giving" hypothesis to data. As the paper describes, the dataset includes "all reported gifts of common stock and contains over 9,000 observations between 1986 and 2020. The total volume of gifts contained in our dataset is approximately 2.1 billion shares, with a dollar value of approximately $50 billion." And what they find is that "large shareholders’ gifts are suspiciously well timed. Stock prices rise abnormally about 6% during the one-year period before the gift date and they fall abnormally by about 4% during the one year after the gift date, meaning that large shareholders tend to find the perfect day on which to give."
Rather than ascribe these finding to insider-donors' incredible good luck, the paper instead develops two possible alternative explanations: "information leakage" and "backdating." Specifically, "executives seem to provide large shareholders with material non-public information, who then use it to time gifts. We also find a second explanation to be supported, though its magnitude is smaller – backdating. The telltale sign of backdating is that the givers’ extraordinary luck tends to grow alongside the delay they take in reporting the gift. A donor who waits a few weeks to report a gift can cherry pick the very best date to retroactively claim their gift was consummated. That is precisely what we find." An excerpted abstract follows.
"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….”
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