Wednesday, January 12, 2022

Arya, Mittendorf & Ramanan, A Model of Equity Pricing in Light of Insider Stock Donations

Anil Arya (Ohio State), Brian Mittendorf (Ohio State) and Ram Ramanan (SUNY at Binghamton) have posted A Model of Equity Pricing in Light of Insider Stock Donations to SSRN. Its abstract follows:

Corporate insiders face substantial restrictions on stock sales, but many have viewed receiving tax deductions from charitable donations of stock holdings as an alternative way to benefit. In fact, empirical evidence consistently indicates that executives make use of their private information in determining the size and timing of their charitable giving. This paper develops a parsimonious model of informed stock trading that accounts for the practical consideration that disposal of stock by insiders often takes the form of charitable donations rather than direct trading. We demonstrate that equilibrium charitable gifts by insiders reflect their private information about firm value and do so in a manner that facilitates price discovery even more efficiently than routine informed trading does. Given the heightened sensitivity of stock donations to firm value, the results provide implications of such donations for market properties, market participants, and charity proceeds, as well as identify how these effects vary with prevailing tax policy.

Samuel D. Brunson

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