Opportunistic Insider Trading Research Articles

Judge Ideology and Opportunistic Insider Trading

Judge Ideology and Opportunistic Insider Trading

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.

Fragmented Securities Regulation, Information-Processing Costs, and Insider Trading

Using a unique setting where stand-alone banks submit filings to bank regulators instead of the U.S. Securities and Exchange Commission (SEC), we examine the consequences of fragmented securities regulation for information-processing costs and opportunistic insider trading. We find the market reaction to insider-trading filings on FDICconnect is less timely than to those on SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system, suggesting FDICconnect generates higher information-processing costs. We also find only large investors trade more on insider-trading filings on FDICconnect than on insider-trading filings on SEC EDGAR, thus extracting benefits from the delayed market reaction to insider-trading filings on FDICconnect. Finally, we find increased insider selling in stand-alone banks prior to negative earnings news, suggesting insiders’ opportunistic use of private information. These findings collectively suggest regulatory fragmentation undermines market efficiency and distorts the level playing field. This paper was accepted by Suraj Srinivasan, accounting. Funding: This work was supported by the Eugene Lang Junior Faculty Fellowship. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2023.4903 .

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.

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.

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.

CEOs’ Narcissism and Opportunistic Insider Trading

CEOs’ Narcissism and Opportunistic Insider Trading

Management friendship and insider opportunism

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.

I only fear when I hear: How media affects insider trading in takeover targets

We study how target firm insiders respond to Wall Street Journal articles referring to illegal insider trading in past mergers. Such articles lead to target insider share purchases before bid announcement to drop by 75%. This effect is stronger nearer the bid announcement and increases with article visibility. It remains significant after controlling for public enforcement intensity, but is weakened by the greater potential for profitable trading. Our results suggest insider trading articles temporarily heighten the perception of litigation and reputation risks. Overall, our study indicates that such articles have a meaningful short-term deterrence effect on opportunistic insider trading, and highlights the disciplinary role of the media. • We document a deterrence effect of media on insider trading. • Insider purchases before M&A drop 75% after WSJ news on past insider trading cases. • Articles temporarily heighten perception of litigation and reputation risks. • Effect is stronger nearer bid and increases with article visibility. • Effect remains unaffected by enforcement but weakened by potential trading profits.

Profits to opportunistic insider trading before and after the Dodd-Frank act of 2010

PurposeThe authors examine if opportunistic insider trading profits decrease after the enactment of the Dodd-Frank Act (DFA) in 2010. The DFA expands legal prohibitions on insider trading in the USA.Design/methodology/approachThe authors identify opportunistic insider trades following a method that is outlined in Cohen et al. (2012). The authors examine univariate statistics and perform multivariate regression tests to examine opportunistic trading profits before and after the DFA. Similar multivariate regression tests have been used widely in the literature to examine the profitability of insider trades.FindingsThe authors find that opportunistic insider purchases were highly profitable before the DFA. Profits after opportunistic purchases were significantly lower after the DFA. Opportunistic insider sales were contrarian trades both before and after the DFA. However, share prices kept increasing after insiders sold their shares.Originality/valueTo the best of the authors’ knowledge, the paper is the first study that compares the profitability of opportunistic insider trades, as identified by Cohen et al., before and after the DFA. The study contributes to the literature that finds that insiders change their strategic trading behavior when the potential costs of the illegal trading increase due to regulatory action.

Freedom of the press and corporate misconduct

AbstractThis study examines how freedom of the press affects corporate misconduct, focusing mainly on earnings management. I find that firms engage more in earnings management when they have a high percentage of sales in countries with restricted media freedom. I find that the influence of foreign partners’ media freedom on earnings management depends on how domestic investors process information about firm export markets and how multinational firms shape their relationship with stakeholders. Additionally, the presence of analysts in foreign countries reduces firms’ incentives to exploit media restriction to manipulate earnings. Finally, I further show that insiders of these firms tend to be involved in opportunistic insider trading, which could indicate corporate misconduct. Overall, these results show that corporate misconduct can be in part explained by a spill‐over effect of the media freedom of export markets.

News media and insider trading profitability: An emerging country perspective

We test news media's disciplining by dissemination role and predictive power in insider trading related issues with a large and novel dataset on Chinese firms between 2008 and 2017. We find that more media coverage is associated with significantly lower level of insider trading profitability, which confirms the disciplining by dissemination role of media documented in the developed market. However, as a new evidence to the media and insider trading literature, we also find that media's negative tone has a positive correlation with future insider trading profitability, which is consistent with the media predictive power argument. In addition, we find that media's predictive power is amplified by a firm's good governance structure and low level of information asymmetry. Our study shows news media's effectiveness in predicting opportunistic insider trading in China.

Labor Voice in Corporate Governance: Evidence from Opportunistic Insider Trading

Labor Voice in Corporate Governance: Evidence from Opportunistic Insider Trading

Retail Investor Attention and Insider Trading

We document a strong link between retail investor attention and opportunistic insider trading. An increase (decrease) in retail attention on a stock is associated with significantly more insider selling (buying). Compared to other types of insider trades, trades that are associated with investor attention generate substantially higher returns. Attention-related insider sales are also associated with a lower risk of SEC investigation and tend to increase following news releases regarding SEC enforcement actions. The results are stronger for lottery stocks, for nonindependent insider directors, and for firms that exhibit weaker governance and poorer social responsibility.

부정적 사건 전 내부자거래 행태

We investigate the insider trading behavior before the disclosure of negative events. Specifically, we examine whether insider sales increase before a negative event occurs, when they concentrate, and whether corporate governance plays an active role in monitoring insider trading.BRThe major findings of the study are as follows.BRFirst, the stock prices of firms with negative events decline about 10 months before the negative events. Insider trades by executives and largest shareholders show significant net selling behavior at least 24 months before the negative events. It is interpreted that insiders with private information about firm’s future negative events sell stock in advance to avoid losses. Second, foreign investors or institutional investors do not play a significant role in monitoring opportunistic insider trading before negative events such as accounting fraud detection and administrative issues designation. Third, insider sales of ‘10% or more major shareholders’ occurred much later than those of ‘executives and largest shareholders’. It could be due to the different ability of the insider to access the inside information of the firm.BRThis study extends the scope of related research by analyzing the insider transactions that occur before negative events such as detection of fraud or administrative issues designation in Korea. In addition, the results of this study show that insider trading occurs two years before the negative event, which provides useful insights for the regulatory authorities in charge of preventing unfair insider trading in the capital market.

Predicting shareholder litigation on insider trading from financial text: An interpretable deep learning approach

The detrimental effects of insider trading on the financial markets and the economy are well documented. However, resource-constrained regulators face a great challenge in detecting insider trading and enforcing insider trading laws. We develop a text analytics framework that uses machine learning to predict ex-ante potentially opportunistic insider trading (using actual insider trading allegation by shareholders as the proxy) from corporate textual disclosures. Distinct from typical black-box neural network models, which have difficulty tracing a prediction back to key features, our approach combines the predictive power of deep learning with attention mechanisms to provide interpretability to the model. Further, our model utilizes representations from a business proximity network and incorporates the temporal variations of a firm’s financial disclosures. The empirical results offer new insights into insider trading and provide practical implications. Overall, we contribute to the literature by reconciling performance and interpretability in predictive analytics. Our study also informs the practice by proposing a new method for regulators to examine a large amount of text in order to monitor and predict financial misconduct.

Does board independence constrain insider opportunism?

We examine whether insider opportunism is reduced by board independence. Using a sample of 18,194 firm-year observations over the period 1996–2016, we show that board independence constrains opportunistic insider trading. Our identification strategy uses the Sarbanes–Oxley Act of 2002 (SOX Act) and associated changes to the listing rules of NYSE/NASDAQ as a source of exogenous shocks in board independence. Our results are economically significant as insider opportunism declines by about 10.5%. We find that insider trading restrictions is the channel through which board independence reduces insider opportunism. Our additional analyses show that in competitive and R&D (research and development) intensive firms, the impact of board independence on opportunism is less pronounced. We also find that board independence constrains opportunism only in less complex firms. However, in co-opted boards, independent directors are less effective. Overall, we support the monitoring channel of board independence for reducing insider opportunism. JEL Classification: G14, G34, G40

Labor Voice in Corporate Governance: Evidence From Opportunistic Insider Trading

This study examines whether labor plays a role in corporate governance by deterring opportunistic insider behavior. Results suggest that firms with organized labor experience statistically significant declines in opportunistic insider trading activity and profitability. We show three economic mechanisms that explain labor's disciplinary effect on opportunistic insider trading behavior: employee welfare, activist union-affiliated institutional investors, and media and political support. Further analyses suggest that labor's corporate governance reduces the incidence of illegal insider trading, enhances firm productivity and performance, and lowers insider trades' return predictability.

The Dark Side of Management Connection: Evidence from Opportunistic Insider Trading

The Dark Side of Management Connection: Evidence from Opportunistic Insider Trading

Insider Trading Ahead of Cyber Breach Announcements

Stock market reactions to cybersecurity breach announcements are generally negative. In virtually all cases, information asymmetry exists between firm management and investors between the date of cybersecurity breach discovery and the public announcement of the breach. We find significant evidence of opportunistic insider trading, with insiders saving an average of $35,009 due to their timely selling in the three months prior to the announcement of a cybersecurity breach. Late filing violations by insiders, which are indicative of stealth trading, are more likely to occur near the announcement of a cyber breach. We also find that the bulk of opportunistic trading tends to occur 55 to 72 days before the public announcement. The results lend support to the SEC’s recently announced goal of tightening restrictions on insider trading ahead of cyber breach announcements, and we make several policy recommendations based on our findings.