Insider Trading, Executive Pay Disparity and CEO Turnover

This paper examines the relationship between insider abnormal trading returns, executive pay disparity, and CEO turnover. Our study finds both independent and interaction effects of insider abnormal returns and CEO pay gap on the probability of CEO turnovers. First, an increase in insider purchase abnormal returns reduces the likelihood of CEO turnover, while an increase in insider sales abnormal returns signals a greater likelihood of CEO dismissal. Second, there is a negative impact of CEO pay gap on the probability of CEO turnover in insider purchases but not a positive impact of CEO pay gap on the probability of CEO turnover in insider sales. Third, the interaction between insider abnormal returns and CEO pay disparity mitigates the impact of insider returns and amplifies the impact of CEO pay gap on the probability of CEO dismissal. In particular, it reduces the positive effect of insider selling returns, offsets the negative effect of insider purchase returns, and magnifies the negative impact of CEO pay disparity on the likelihood of CEO dismissal in insider purchases