Managerial ownership, incentive contracting, and the use of zero-cost collars and equity swaps by corporate insiders

Zero-cost collars and equity swaps provide insiders with the opportunity to hedge the risk associated with their personal holdings in the company's eq uity. Consequently, their use has important implications for incentive-base d contracting and for understanding insider trading behavior. Our analysis indicates that these transactions generally involve high-ranking insiders a nd effectively reduce their ownership by about 25%, on average. Given the p otential of these financial instruments to substantially alter the incentiv e alignment between managers and shareholders, we suggest that increasing t he transparency of these transactions may provide valuable information to i nvestors.