Tax-favored Stock Donations by Corporate Insiders and Consequences for Equity Markets

Corporate insiders face substantial restrictions on stock sales, but many have viewed receiving tax deductions from charitable donations of stock holdings as an attractive alternative. In fact, empirical evidence consistently indicates that executives even make use of their private information in determining the size and timing of their charitable giving. This paper develops a parsimonious model of informed stock trading that accounts for the practical consideration that disposal of stock by insiders often takes the form of tax-favored charitable donations rather than direct trading. We demonstrate that equilibrium charitable gifts by insiders reflect nonpublic information about firm value and do so in a manner that facilitates price discovery even more efficiently than routine informed trading does. Given the heightened sensitivity of stock donations to firm value, the results provide implications of such donations for market properties, market participants, and charity proceeds, as well as identify how these effects vary with prevailing tax policy