Tuesday, May 27, 2008
David L. Yermack (Professor of Finance, Daniel P. Paduano Faculty Fellow, Yamaichi Faculty Fellow, New York University Stern School of Business) has recently posted on SSRN his article entitled Deduction Ad Absurdum: CEOs Donating Their Own Stock to Their Own Family Foundations.
Here is the abstract of his article:
I study large charitable gifts by Chairmen and CEOs of public companies using their own company stock as the donation currency. Unlike open market sales, gifts of stock are not subject to insider trading law and have very lenient disclosure requirements.
Consistent with their exemption from insider trading law, I find that CEOs' stock gifts occur just prior to significant drops in their firms' stock prices, a pattern that enables the donors to obtain increased personal income tax benefits. This timing is more pronounced when executives donate their own shares to their own family foundations, which I identify using foundations' IRS tax returns posted on Internet databases. Stock gifts are also strategically timed to occur prior to unfavorable quarterly earnings announcements and after positive earnings announcements.
Evidence related to reporting delays and seasonal patterns suggests that some CEOs backdate stock gifts to their own family foundations in order to increase personal tax benefits.
CEOs' family foundations hold donated stock for long periods rather than diversifying, permitting CEOs to continue voting the shares but violating standard prudent investor principles of risk reduction through diversification.
These results highlight an odd juxtaposition of motives, suggesting that while making charitable contributions to support good works in society, CEOs use aggressive and perhaps fraudulent tax evasion strategies.