Insider trading around ESOP announcements: Wealth effect vs. control effect

Following the enactment of ERISA (Employee Retirement Income Security Act) in 1974, employee stock ownership plans (ESOPs) have become a popular form of employee compensation among U.S. companies. The introduction of an ESOP has important implications for management interest that should encourage insiders buying activity. This paper documents that unusual insider buying activity has indeed resulted from the introduction of an ESOP. Further we examine two competing explanations, the wealth hypothesis and the control hypothesis, for the increase in insiders buying activity. We conclude that insiders buying activity is primarily motivated by control considerations.