Insider Trading as a Compensation Mechanism

Abstract We find evidence that insiders at resource constrained firms trade more often and in patterns indicating the use of private information. Our findings are driven by insider sales relative to cash‐based compensation. This indicates that when compensation is not directly tied to firm value, insiders are more likely to trade opportunistically, even if their trade transmits a negative market signal. Insiders also realize significant abnormal returns following transactions at resource constrained firms, indicating that insiders are trading with private information and consistently profiting. Overall, these results suggest that insiders at resource constrained firms utilize insider trading to supplement their compensation.