Abstract
Based on the organizational psychology and social norms theories, we provide empirical evidence on the effect of local religiosity on insider trading activity. We find that local religiosity has a negative and statistically significant impact on insider trading activity, which is robust to alternative model specifications, selection bias, reverse causality, omitted variable bias, and measurement errors. Local religiosity negatively affects both insider purchase and sale activity, supporting the predictions of the morality and risk-aversion traits of local religiosity. However, the effect of the risk-aversion trait dominates the morality trait since the negative effect of local religiosity on insider sale transactions is higher. We also show that the level of information asymmetry, a key driver of insider trading activity, magnifies the effect of local religiosity on insider trading activity. Overall, local religiosity works as a compensatory control mechanism moderating the effect of managerial rent extraction motives on insider trading activity.
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