"Insider giving" - An unfortunate donation strategy used by corporate insiders to avoid losses

by jasonk1 min read14th Apr 20213 comments

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Law
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"Insider giving" is sad to learn about and certainly inflates donation figures.

Quoting from the abstract of 'Insider Giving' (71 Duke Law Journal (Forthcoming 2021; UCLA School of Law, Law-Econ Research Paper No. 21-02):

Corporate insiders can avoid losses if they dispose of their stock while in possession of material, non-public information. One means of disposal, selling the stock, is illegal and subject to prompt mandatory reporting. A second strategy is almost as effective and it faces lax reporting requirements and legal restrictions. That second method is to donate the stock to a charity and take a charitable tax deduction at the inflated stock price. “Insider giving” is a potent substitute for insider trading. We show that insider giving is far more widespread than previously believed.

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Interesting theory!

certainly inflates donation figures

Presumably this effect would be significantly reduced if charities sold the stock as soon as they received it, as they would also sell at the 'inflated' price?

I think sometimes they can write into the donation various stipulations around how fast they sell it. If you were looking to avoid scrutiny, you might take advantage of that.

Interesting! It's not that obvious to me that this is bad. Eg, if this gets people donating stock rather than donating nothing at all, this feels like a cash transfer from the government to charities?

Of course, WHICH charities receive the stock matters a lot here

inflates donation figures.

From the article linked:

And what they find is that "large shareholders’ gifts are suspiciously well timed. Stock prices rise abnormally about 6% during the one-year period before the gift date and they fall abnormally by about 4% during the one year after the gift date, meaning that large shareholders tend to find the perfect day on which to give."

A 4% inflation really doesn't seem that bad? Especially since, as Larks says, charities can sell stock themselves much sooner than a year.