Inferring Corporate Insiders’ Beliefs About Firm Value From Tax Withholding Elections

Exploiting tax withholding elections around equity compensation transactions, we find that tax withholding predicts annualized next month returns that are 4% – 8% lower than not withholding. Withholding is more informative in the presence of greater information asymmetry and following personal tax rate changes. Examining the extent to which withholding reflects opportunism, we find that, during blackout trading periods, withholdings are more likely to occur and more predictive of earnings announcement surprises than sales. Insiders eventually sued by the SEC change their election choice more frequently, and the informativeness of withholding is lower in the year of an SEC enforcement action.