An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Li Jin
Harvard Business School

S. P. Kothari
Massachusetts Institute of Technology

Abstract: We document that CEOs frequently sell large amounts of their unrestricted firm equity. These sales are designed not simply to offset the current year grant of options and stock. We find that the tax burden associated with the sale deters CEOs from selling their equity. This effect of taxes remains significant even after controlling for other determinants of CEOs’ sale of equity, including diversification and managerial overconfidence. We also find that taxable institutional investors and CEOs both respond to taxes in their selling of equity, although the CEOs appear to be less tax-sensitive. Other determinants affect CEOs’ selling decisions largely as predicted in the existing literature.

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