CEO Stock Donations

In my paper Deductio Ad Absurdum: CEOs Donating Their Own Stock to Their Own Family Foundations, which was recently accepted for publication in the Journal of Financial Economics, I explore whether executives exploit the insider trading gift loophole to make well-timed charitable donations of stock in advance of price declines, a strategy that would allow the donors to use their access to inside information to obtain personal income tax benefits. Unlike open market sales, gifts of stock are generally not constrained by U.S. insider trading law, and company officers can often donate shares of stock to charities at times when selling the same shares would be prohibited.

I focus upon Chairmen and CEOs of U.S. public companies that establish private family foundations and then make large contributions to these foundations out of their personal holdings of company shares. Because these donors generally control the entities on either side of these transactions, while also having private information about the future prospects of their companies, one might expect well-timed donations to private family foundations to be relatively easy to accomplish and document. My sample consists of 150 large gifts made by 89 different executives between mid-2003, when the SEC established electronic filing requirements for stock transfers, and the end of 2005.

Consistent with their exemption from insider trading law, I find a pattern of excellent timing of Chairmen and CEOs’ large stock gifts to their own family foundations. On average these gifts occur at peaks in company stock prices, following run-ups and just before significant price drops. A variety of tests give some support for the hypothesis that CEOs time their gifts based on inside information. For instance, a few CEOs make gifts of stock just before adverse quarterly earnings announcements, a time at which company “blackout” periods would almost always prohibit open market sales. Other CEOs delay stock gifts until just after positive quarterly earnings announcements. In addition, tests used to infer the backdating of executive stock option awards yield results consistent with the backdating of CEOs’ family foundation stock gifts. For instance, I find that the apparent timing of certain subsamples of family foundation stock gifts improves as a function of the elapsed time between the purported gift date and the date on which the required stock gift disclosure is filed by the donor with the SEC. Stock gift backdating, if followed by the filing of a personal tax return claiming a charitable gift deduction, would likely represent tax fraud in violation of IRS rules.

Overall, these results suggest an odd juxtaposition of motives on the part of corporate executives who donate stock. While nominally transferring part of their fortunes to charitable foundations for civic purposes, many appear simultaneously to exploit gaps in the regulation of insider trading or even to backdate their donations to increase the value of personal income tax benefits. Data in the paper also cast a long shadow upon the increasingly popular role of private family foundations as conduits for charitable contributions by the wealthy.

The full paper is available for download here.