Does Corporate Governance Quality Influence Insider Trading around Private Meetings between Managers and Investors?

Abstract

SYNOPSIS We examine the effectiveness of corporate governance in influencing insider trading around private in-house meetings (hereafter “private meetings”) between management and investors in China. Consistent with better corporate governance curbing (1) disclosure of nonpublic price-sensitive information and (2) insider trading, we find that better governance quality is associated with reduced insider trading frequency, value, and profitability around private meetings. Firms with better corporate governance appear to exchange less price-sensitive information with outsider investors around private meetings, which limits the opportunity to make profitable insider trades. Our results are economically significant and robust using instrumental variable and propensity score matching approaches to address endogeneity. We argue that improving corporate governance quality may be a partial substitute for costly government regulation designed to curb insider trading around private meetings. JEL Classifications: G34; G14; G18.