Abstract
This study documents a significant increase in both trading activity and profitability of opportunistic top managers when a CEO develops a strong connection with subordinate executives through co-opting the executives who share social ties with him/her. This baseline evidence is robust to endogeneity concerns, alternative measures of management connection and insider opportunism, as well as controlling for other CEO and board attributes. Further analyses reveal that interpersonal connections between top managers are more likely to increase opportunistic insider trading in firms with lower-quality voluntary disclosures, more sociable executives, and relaxing legal barriers to insider trades. Increased insider opportunism in response to the CEO’s connection with other top executives engenders less informative stock prices and depresses stock market liquidity. Finally, insider trades in firms with stronger management connection are more predictive of future stock returns.
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