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Information, Insider Trading, Executive Reload Stock Options, Incentives, and Regulation

We introduce a theoretical model of executives with insider information who receive executive stock options (ESOs) as incentives and optimize their “outside wealth” portfolios. We show that insider information nullifies ESO incentivizing, misaligning executives’ and shareholders’ interests. We offer realigning methods: granting executives with reload stock options (RSOs) while imposing a blackout trading period. Effective blackouts keep executives incentivized without over-restricting, i.e., reducing executives’ welfare below that of outsiders. We introduce RSO pricing for insider executives and offer policy implications: reestablishing the currently “out of favor” RSOs, allowing firms, not regulators, to set effective blackouts on securities they issue.