In their article Insider Giving in Duke Law Journal, S. Burcu Avci, Cindy A. Schipani, H. Nejat Seyhun, and Andrew Verstein, use their dataset to illustrate the scope, strategies, and effects of insider giving. In this context, insider giving refers to shareholders with inside information and/or the ability to backdate their gifts donating securities to charity before price drops, allowing them to claim tax deductions. The authors highlight strategies used by directors and officers using their access to corporate information to time their charitable giving. They identify four strategies: waiting game, spring loading, gun jumping, and bullet dodging. The study advances the premise that insider giving is a widely-used alternative to insider trading because it faces a lower risk of enforcement. Shareholders also benefit from lax reporting requirements for gift giving. The laws applicable to insider giving are less clear and less well developed compared to those specifically addressing insider trading. However, remarks by SEC Chair Gensler call for amendments to Rule 10b5-1, which may address insider giving, see more on 10b5-1 plans here.
The study sample includes US common stock from January 1986 through December 2020; the total number of gifts is 9,858. Notably, they find that in the year before gifts were made by large shareholders the stock price rose about 6% abnormally relative to the market index, and the stock price fell abnormally about 4% relative to the overall stock market following the gift date. The average maximum stock price occurred near the day of the gift. Thus, indicating, according to the authors, that potentially manipulative timing strategies were used for gift giving. In addition, their data demonstrates that access is more important than backdating (even though the two can occur concurrently). However, their data tends to indicate that backdating appears to be commonplace; for gifts reported between 3 and 20 day delays, stock prices rose about 5% before the gift and declined 5% in the year after, suggesting possible backdating.
The authors' findings indicate that large shareholder gifts to charity are primarily based on material non-public information from top executives, and less so from backdating. According to the authors, these practices harm corporate issuers, retail traders, and the market. The authors call for reforms including less lenient policies towards suspiciously timed gifts, which potentially involves amendments to current securities laws. This article can be read here.
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