Does regulating executive compensation impact insider trading?

We examine whether equity incentive regulations help to reduce managerial incentives for manipulating earnings to gain trading advantages over shareholders. Using a sample of trading records for Chinese listed firms between 2006 and 2016, we find evidence that equity incentives reduce the positive association between insider trading and earnings management. In addition, we find that the impact of equity incentives on this association is more pronounced in state-owned enterprises (SOEs). Furthermore, we find that China's regulatory ban on the granting of equity to insiders with large shareholdings reduces the positive relation between insider selling and earnings management. Our additional tests provide strong evidence that regulatory requirements concerning the vesting conditions are negatively associated with managerial opportunistic behavior. Altogether, our results provide strong support for amendments to strengthen regulations on equity incentives in countries where overall corporate governance is weaker.