Insider Trading Profitability Research Articles

Does social trust mitigate insiders' opportunistic behaviors? Evidence from insider trading

Does social trust restrain or exacerbate the opportunistic behaviors of corporate insiders? On the one hand, insiders susceptible to a high-trust environment will be less opportunistic; on the other hand, unethical insiders may exploit high-trust people to engage in more opportunistic behaviors. This paper tests the two competing hypotheses by investigating how trust surrounding corporate headquarters affects insider trading profitability, assuming that opportunistically informed trades have higher trading profits. We show that social trust negatively affects insiders' trading gains. This relationship holds after instrumental variable regressions and a difference-in-difference framework. Additionally, the role of trust is more prominent when insiders face more trading opportunities from information asymmetry, weak monitoring, and concentrated ownership structure; however, the impact of trust attenuates when formal regulations are in place. We also examine the indirect channels, including cautious financial reporting, informative disclosure, and active communications with investors through which social trust can deter informed trading. Our findings suggest that social trust can discourage opportunistic proclivity and spur more ethical deeds among managers.

Key audit matters and insider trading profitability: Evidence from China

The debate as to whether or not an expanded audit report is informative to the market persists, either from experimental and empirical study perspectives. With the utilization of 4,336 firm-year Chinese observations from 2016 to 2017, this study investigates whether the mandatory disclosure of key audit matters (KAMs) restricts insider trading profitability in China. The main test and robustness tests confirm the significant and negative relationship between KAM disclosure and insider trading profitability in the Chinese capital market. The study further explores the impact of KAMs’ textual characteristics using the KAM data from 2017 to 2020. The results suggest that firm-specific KAMs, longer KAMs, more readable KAMs, and more accurate KAMs reduce the insider trading profitability. Supplementary analysis shows that this effect only exists for opportunistic insider trading. In addition, the effect of KAM disclosure on insider trading profitability is further amplified by high institutional ownership, auditor industry specialization, and KAM with goodwill impairment matter. Overall, the study presents some evidence of the communicative value of KAM disclosure and provides a practical means to restrict insiders’ opportunistic behavior, highlighting the decision-making usefulness of KAMs for external investors.

Say on Pay Laws and Insider Trading

ABSTRACT We examine whether mandatory adoption of say on pay increases executives’ incentives to engage in insider trading to compensate for the negative impact of say on pay on the value of their explicit compensation packages. Our empirical design exploits the staggered adoption of say on pay laws across 14 countries over the 2000–2015 period. We find that mandatory adoption is associated with a material increase in insider trading profits, especially in firms where executive pay is most affected. The increase in insider trading profits is driven mostly by more frequent and larger profitable insider sales, consistent with executives’ desire to reduce their greater exposure to firm-specific risk while increasing their trading profits. Overall, our results highlight the importance of considering potential effects on insider trading incentives when designing compensation reforms and when assessing their effectiveness. Data Availability: All data used in the paper are available from cited public sources. JEL Classifications: G30; G34; G38; J33; K22; M12; M16.

The impact of foreign ownership on the media’s role in curbing insider trading around private meetings

This paper investigates whether the media, as an external governance mechanism, constrains insider trading. In addition, we study two competing views of foreign ownership as an internal corporate governance mechanism – better monitoring and short-termism – by investigating the interaction effects of foreign ownership and the media on insider trading profitability. Using a unique database of private in-house meetings from 2012 to 2017, we find that media coverage is positively related to insider trading profitability, demonstrating the media’s failure as an external governance mechanism in curbing corporate insider trading. This positive relationship is stronger when foreign ownership is present, either in the form of foreign portfolio investment or foreign direct investment. Our finding that certain types of foreign investment worsen the media’s role in disciplining insider trading prompts the public to think more critically about the monitoring role of the media and foreign investment in private meetings.

Social media, investor-company interaction and insider trading profitability: Evidence from China

The emergence of social media enables minority shareholders to participate in corporate governance by making their voice heard. This study examines the effect of social media interaction between minority shareholders and companies on insider trading profitability. Using the “Easy interaction” platform in China, we find robust evidence that social media interaction significantly reduces the profitability of insider trades. This negative effect is stronger for firms with higher management shareholdings, poorer information environment, and less government involvement. Overall, our findings indicate that social media can play a role in corporate governance by restricting the profits of opportunistic insider trading activities.

Profitability of insider trading in Turkey

This study presents the first comprehensive evidence of insider trading patterns and abnormal profits in the Turkish stock market using almost 65,000 insider transactions for the period of 2008–2019. Our findings show that insiders earn a significant 6.58% abnormal profit during the one year following insider trading. Officers, directors, and institutional investors earn even more. Both purchases and sales are profitable. Top executives, major shareholders, and institutional investors earn significant dollar profits. Additionally, uninformed investors can beat the market by mimicking the portfolios of insiders, while evidence shows that regulatory changes do not reduce insiders’ profits. Finally, this study provides important trading implications for investors and regulatory implications for policymakers everywhere.

Does Social Capital Mitigate Managerial Self-Dealing? Evidence From Insider Trading

In this study, we examine whether the social capital surrounding the firm’s corporate headquarters mitigates managerial self-dealing in the form of opportunistic insider trading. We find strong evidence that the level of social capital in the region surrounding the firm’s headquarters is negatively and significantly associated with insider trading profitability. We also find that the negative association between social capital and insider trading profitability is more pronounced when governance is weaker and corporate opacity is higher, instances where insiders have greater opportunities to trade on their private information. Further analyses on the potential mechanisms suggest that the negative association is stronger when the firm’s social networks are denser and when the civic norms in the region are stronger. Overall, our article contributes to the growing social capital literature in accounting and finance by providing direct empirical evidence that social capital mitigates managerial self-serving behavior in the form of opportunistic insider trading.

Enforcement of Non‐Compete Agreements, Outside Employment Opportunities, and Insider Trading*

ABSTRACTEnforcement of non‐compete agreements could affect executives' and directors' incentives to profit from their information advantage. This is because excessive trading profits could result in job termination, which would trigger the restrictions imposed by the non‐compete agreements. We find that executives' and directors' insider trading profits from sales are lower for companies headquartered in states with greater enforcement of non‐compete agreements. The path analyses suggest that high enforcement of non‐compete agreements disincentivizes managers to profit from their information advantage to avoid the possibility of job termination and the cost of job terminations. We also find that insiders in companies headquartered in states with greater enforcement of non‐compete agreements are less likely to exploit their information advantage by timing their sales before unfavorable corporate earnings announcements. The results suggest that enforcement of non‐compete agreements reduces executives' and directors' incentives by imposing costs on future outside employment opportunities.

Does common ownership constrain managerial rent extraction? Evidence from insider trading profitability

This study identifies a new economic benefit of common institutional ownership, which refers to the increasingly contentious phenomenon of U.S. firms sharing stockholders with their industry competitors. We find a significantly negative relation between common ownership and insider trading profitability. The disciplinary effect of common ownership on opportunistic insider trading is particularly evident when the information effects of common ownership are greater, when common owners are more likely to benefit from positive governance externalities, and in the subset of trades made by opportunistic insiders. Using the exogenous variations in common ownership induced by financial institution mergers, we conduct a difference-in-differences analysis and find consistent results. We also provide evidence that common owners encourage firms to impose ex-ante restrictions on insider trading and take ex-post actions to discipline opportunistic insiders by voting against management. Overall, our findings suggest that common institutional shareholders have information advantages, governance incentives, and effective means to constrain opportunistic insider trading.

Insider trading in multinational firms

AbstractWe explore insider trading at multinational firms and find multinational firm insiders make larger trades followed by larger abnormal returns relative to those at domestic firms. Multinational firm insiders profitably purchase underpriced, value stocks with low past returns. They trade more profitably, not only because of market pricing opportunities, but also because of the advantageous timing of informed trades before earnings announcements. Insider trading profits are highest at multinational firms with foreign sales in regions culturally and linguistically distinct from the United States. These findings are consistent with opportunistic insiders strategically profiting from difficult to process foreign information.

Religion and insider trading profits

We use the controversial aspect of insider trading to analyze the impact of local social norms on insiders’ profits. We argue that religiosity is a source of social norms curbing self-interested behavior and, accordingly, it limits corporate insiders’ opportunistic trading on private information. Our results confirm that trades by insiders in firms located in more religious areas are followed by lower profits, those insiders are less likely to trade on future earnings news, and their trades are less likely to be opportunistic. The effect of religion on profitability of insider trading holds across different levels of disclosure environments and is more pronounced in firms with poor corporate governance. Overall, we offer new insights into the effect of social norms on individuals’ financial decisions.

Does Common Ownership Constrain Managerial Rent Extraction? Evidence from Insider Trading Profitability

Does Common Ownership Constrain Managerial Rent Extraction? Evidence from Insider Trading Profitability

Clawback Provisions and Insider Trading Profits

Clawback Provisions and Insider Trading Profits

Executive compensation, individual-level tax rates, and insider trading profits

We examine whether individual-level taxes affect executives' propensity to use nonpublic information in insider trades. We predict and find a positive relation between abnormal insider trading profitability and income tax rates. Using plausibly exogenous variation in state income tax rates, we estimate that the average executive uses insider trading profits to offset between 12.2% and 19.6% of the effect that income taxes have on their net compensation. We show that the sensitivity of these profits to tax rates varies predictably with the executives' compensation and shareholdings, firm monitoring effectiveness, and information asymmetry between insiders and outside investors. We also demonstrate a positive association between SEC enforcement actions and tax rates, suggesting that tax-rate-driven changes in abnormal trading profits expose insiders to legal risk. We find that insider trading volume exhibits little sensitivity to tax rates. Our findings show that income taxes affect executives’ tendency to use private information in their trades.

Corporate social responsibility and insider trading profitability: Evidence from an emerging market

In this study, we examine whether and how corporate social responsibility (CSR) affects insider trading profitability by using a sample of Chinese listed firms from 2011 to 2018. We find that CSR is positively associated with insider trading profitability, especially insider sale profitability, which indicates that insiders tend to reap private benefits from CSR. Our findings are robust to the consideration of alternative proxies, sample bias, and endogeneity concerns. Moreover, we find that the positive relation between CSR and insider trading profitability is more significant before the regulator strengthens its supervision of insider trading, and that this positive relation is weakened by the nature of state-owned enterprises (SOEs), institutional ownership, and analyst coverage.

The role of corporate governance towards insider trading profitability

PurposeAn effective corporate governance system helps to smoothly run business operations and manage financial matters. To ensure that management behavior is ethical, and their decisions are in the best interest of shareholders, corporate governance plays a vital role. This study aims to examine the impact of corporate governance on the insider trading profitability of listed banks in Pakistan, Bangladesh and India.Design/methodology/approachThe authors take data from the financial statements of 70 listed banks and stock exchanges of the respective countries. The period of the data for our study is from 2010 to 2020. The authors use board independence, the board size, institutional ownership and managerial ownership as measures of corporate governance characteristics. While inside trading profitability is measured with abnormal returns. The authors apply the fixed effect panel regression for hypothesis testing and the two-step dynamic panel system-generalized method of moments (GMM) regression technique for checking the robustness of the findings.FindingsThe authors found that corporate governance has a significant impact on insider trading profitability in Pakistan, Bangladesh and India. Board independence and institutional ownership are negatively related while board size and managerial ownership are positively associated with insider trading profitability.Originality/valueTo the best of our knowledge, this study is the first one to explore the role of corporate governance in limiting insider trading on South Asian banks. It recommends that corporations should follow the code of corporate governance for the protection of shareholders' and other investors' profits.

Do Shareholder Networks Influence Insider Trading? Evidence from China

ABSTRACT Motivated by the social network theories, we examine whether and how shareholder networks affect insider trading. We find that shareholder networks negatively affect insider trading based on a sample of Chinese listed firms from 2009 to 2019. Our results suggest that improving stock pricing efficiency and strengthening corporate governance are two channels through which shareholder networks negatively affect insider trading. Cross-sectional tests show that the relation is more pronounced in firms that have weaker legal environments and less investor attention. Furthermore, expanding shareholder networks attenuates the profitability of insider trading.

Internal information quality and financial policy peer effects

This paper investigates how firms' internal information quality (IIQ) influences the peer effects of their financial policies. Using earnings announcement speed and insider trading profitability difference as measurements, we find that when IIQ is low, firms are more likely to change their leverage following a similar change made by peer firms in the same industry. Our further analysis shows that this mimicking behavior hurts firms' operating performance, and is more prevalent when firms are also characterized by poor corporate governance. Overall, our results indicate that poor information quality could amplify the agency problem, therefore leading to stronger peer effects in corporate financial policies.

Governance in Romania: Exploring the determinants of corporate insider trading

AbstractRomania ranks at the extreme low end in Eastern Europe in terms of Hofstede cultural insights, rule of law, government effectiveness, and corruption—potentially limiting governance quality for restricting resource channeling. In this paper, we examine whether these shortcomings flow over into the degree of corporate insider trading profitability at the firm level. Consistent with high power distance, low individualism, and voice and accountability, executives and their family members extract higher returns. The conjectured monitoring constraint of equity ownership had little impact on reducing profitable trading. Second, media reporting of firm‐related scandals only restrained insider profitability in firms with government ownership—consistent with general forbearance of corruption and sanction from the use of politically controlled assets. Third, the global financial crisis revealed both a crisis of inept trading consistent with high uncertainty avoidance and also highly profitable trades for a limited set of executives who undertook short‐term reversal strategies. Our exploratory microanalysis suggests a prototype to highlight areas requiring governance and investor attention in Eastern European countries.

Short sellers and insider trading profitability: A natural experiment

We examine the impact of short sellers on insider trading profitability using a natural experiment of a pilot program which relaxed short-selling constraints for randomly selected pilot stocks. We find that pilot firms experienced a significant decrease in insider trading profitability during the pilot program. The results are more pronounced for the pilot firms with poor information quality, and for the pilot firms without corporate restrictions on insider trading. Our evidence suggests that short sellers serve an important market disciplinary role by reducing insider trading profitability.