The Impact of Public Disclosure on Equity Dispositions by Corporate Managers

By: David I. Walker

Introduction

Year after year, the senior managers of public companies in the U.S. receive a large chunk of their compensation in the form of company equity—stock and options—and year after year, managers exercise options and sell shares. Between the inflow and the outflow is an equity reservoir. It is well understood among economists that managerial incentives are shaped not just by grants of stock and options, but also by their overall holdings in those reservoirs.¹ The size and composition of these holdings are shaped by several factors, including firm choices regarding the amounts and types of equity compensation awarded, time- and sometimes performance-based vesting restrictions on equity awards, and, in the case of stock options, stock price performance, since options will not be exercised unless they are “in the money,” that is, unless the current market price of the stock exceeds the price that a manager must pay to exercise the option. In some cases, firms impose explicit contractual equity retention obligations on their managers, as well.

In “Stock Unloading and Banker Incentives,” Professor Jackson investigates whether public disclosure of stock sales by managers impacts the size of equity holdings.² Specifically, Jackson investigates the relationship between public disclosure and the magnitude of dispositions—which he refers to as “unloadings”—but what he is really concerned about is the impact of disclosure on the size of the equity reservoirs. Jackson posits that public disclosure of stock sales by company executives subject to the reporting requirements of section 16(a)³ of the Securities Exchange Act of 1934⁴ may deter these individuals from selling, which would increase equity holdings, all else being equal.⁵ The reason, in a nutshell, is that dispositions that are driven solely by diversification needs may be misinterpreted by the market, by colleagues, or by the financial press as signaling a lack of confidence in, or commitment to, the firm.

Next, utilizing a unique set of publicly available, but previously ignored data on stock sales by senior managers at Goldman Sachs, Jackson finds support for his theory.⁶ He finds that in years in which they are subject to section 16(a) reporting requirements, Goldman executives sell less stock than in years in which section 16(a) disclosure is not required.⁷ He also finds that managers anticipate section 16(a) disclosure obligations by selling more shares in the years immediately prior to their elevation to section 16(a) reporting status.⁸ In addition, he finds that of the thirty-odd members of Goldman’s management committee, section 16(a) reporters sell fewer shares than non-reporters.⁹

In the final portion of his Essay, Jackson considers the implications of the relationship he finds between disclosure and stock sales.¹⁰ Here, the glass is both half-empty and half-full. On the one hand, Jackson is optimistic that expanding the reach of public disclosure of stock sales could be a means of increasing equity holdings by managers at public companies who are not subject to section 16(a), which might improve managerial incentives. But he finds the impact of public disclosure troubling in the context of financial institutions, where some worry that concentrated equity holdings by bank managers may fuel excessive risktaking. Given that concern, Jackson argues that bank regulators need information on reservoir size, not just information on inflows and outflows.¹¹

Professor Jackson has embarked on an important project and has produced an excellent Essay. He should be particularly congratulated on his creativity and resourcefulness in identifying and analyzing a source of data on equity dispositions by managers not subject to section 16(a) reporting requirements. To be sure, this data does present some formidable analytical challenges. The analysis is complicated by the potentially confounding effect of a heightened contractual equity retention obligation placed on a subset of the section 16(a) executives, but Jackson does all that one could do to isolate the impact of public disclosure, and I believe he marshals convincing evidence that public disclosure has affected stock sales by Goldman’s managers.

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