Executive Equity Swaps and Corporate Insider Holdings

Abstract

Executive equity swaps have significant benefits for corporate insiders who wish to enhance their current income and maintain voting rights while reducing exposure to equity holdings in their firms. Since swaps do not require the sale of shares, capital gains taxes are delayed. Swaps, however, can reintroduce agency costs. Furthermore, they are very difficult to detect, though disclosure requirements have improved. We provide an examination of the hidden benefits and risks of executive equity swaps. We also discuss the pricing of these instruments and provide a mini-case analysis of the highly publicized Autotote equity swap.