Board Independence Impact on Insider Trading, Before and After SOX

Abstract

We investigate the impact of corporate governance mechanisms, particularly board independence, on the incidence and profitability of insider trades before and after the 2002 enactment of Sarbanes-Oxley (SOX). Prior studies indicate that regulation or compliance with regulation may be ineffective in controlling information-driven insider trading. We show how corporate governance mechanisms can compensate the shortcomings of existing regulations or their enforcement mechanisms in reducing the incidents of information-driven trades. We also distinguish the era before and after the enactment of SOX due to its impact on transparency of insider trading and intensified penalties for illegal insider trading. We also find that profitability of information-driven insider trades is associated with corporate governance strength and that the relation was affected by the passage of SOX such that the impacts of corporate governance mechanisms declined in post-SOX era.