Opportunistic Insider Research Articles

Common institutional ownership and opportunistic insider selling: Evidence from China

We examine the relationship between common institutional ownership and opportunistic insider selling. Using an unbalanced panel of 32,858 firm-year observations of Chinese A-share listed firms from 2007 to 2021, we find that common institutional ownership inhibits opportunistic insider selling, supporting the synergistic governance view. Our evidence indicates that information economies of scale and industry power acquired from shareholding networks enable common owners to exert positive governance effects. Designating directors and officers, voting at shareholders' meetings, and promoting information disclosure are the three essential channels through which common owners perform effective monitoring. Furthermore, the synergistic governance effect is more pronounced in firms with headquarters located in regions with a stronger altruistic culture, better independent director governance, and wider media coverage. Heterogeneity analyses show that non-pressure-sensitive, stable, and transactional common institutional investors effectively inhibit opportunistic insider selling, whereas pressure-sensitive common owners exhibit attenuated effects. Additional tests indicate that common owners significantly reduce the profitability of opportunistic insider trading. Our findings highlight the social attributes and ethical aspects of how common institutional shareholders restricts insider opportunism in emerging markets.

CEOs' narcissism and opportunistic insider trading

CEOs' narcissism and opportunistic insider trading

Insider trading profitability in geographically diversified firms: does managerial ability matter?

ABSTRACT We examine the impact of managerial ability on insider trading profitability within geographically diversified firms, where operational complexity can potentially increase insider advantages. We analyse a sample of 54,899 insider purchase transactions and find that higher managerial ability significantly reduces the positive relationship between geographical diversification and insider trading profitability. Our mechanism tests suggest that managers with higher abilities make better information disclosure and collaborate with more capable boards, to reduce insider trading profitability. Our findings suggest that capable managers prioritize enhancing transparency and aligning interests with shareholders above personal financial gains, reducing opportunistic insider trading within geographically diverse firms.

The dark side of digital transformation: Evidence from opportunistic insider selling

While the benefits of corporate digital transformation are well-documented, evidence of its dark side is scarce. This study examines the effect of corporate digital transformation on opportunistic insider selling. Using a sample of Chinese A-share listed firms, we find that corporate digital transformation significantly contributes to opportunistic insider selling. Moreover, we find that this effect is particularly pronounced for firms that exhibit high information asymmetry, possess weak corporate governance, or have powerful executives. Further analysis suggests that digital transformation increases the profitability of opportunistic insider selling. Overall, our study sheds light on the adverse consequence of corporate digital transformation.

The role of political party in curtailing opportunistic insider sales: Evidence from China

ABSTRACT The unique political system in shaping socio-economic policies in China calls for a detailed exploration of its precise effect on corporate governance. Using the mandatory establishment of a Chinese Communist Party (CCP) branch after 2018 as an exogenous shock, we find that the establishment of a CCP organization reduces opportunistic insider sales. Our paper contributes to the emerging literature on the role government plays in the business environment.

Judge Ideology and Opportunistic Insider Trading

Abstract Although federal judges are the ultimate arbiters of insider trading enforcement, the role of their political ideology in insider trading is unclear. Using the partisanship of judges’ nominating presidents to measure judge ideology, we first document that liberal judges are associated with heavier penalties in insider trading lawsuits than conservative judges. Next, we find that firms located in circuits with more liberal judges have fewer opportunistic insider sales. Cross-sectional analyses show that this deterrent effect is stronger when managers face a higher risk of insider trading lawsuits. Finally, we find that the Securities and Exchange Commission considers judges’ ideology when selecting litigation forums.

The Role of Political Party in Curtailing Opportunistic Insider Sales: Evidence from China

The Role of Political Party in Curtailing Opportunistic Insider Sales: Evidence from China

Annual Report Readability and Opportunistic Insider Selling—Evidence from China

ABSTRACT Using a panel dataset of Chinese A-share listed firms during 2007–2021, we specify a fixed-effects model to examine whether and how annual report readability affects opportunistic insider selling. Our empirical findings show that lower readability of annual reports induces insiders to make more opportunistic sales. Further analysis reveals that stock overvaluation is the channel through which the readability of annual reports affects opportunistic insider sales. In addition, this effect is more pronounced among firms with less analyst coverage, higher retail concentration, and non-SOEs.

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

Capital market liberalization and opportunistic insider sales: Evidence from China

This study examines the causal effect of stock market liberalization on opportunistic insider sales. Using China’s “Shanghai/Shenzhen-Hong Kong Stock Connect” pilot programs as quasi-natural experiments, we find that liberalizing China’s equity market to foreign investors can help restrain the opportunistic selling behavior of managers by complementing traditional legal enforcement and regulation mechanisms. We further identify-two main plausible mechanisms that support our results: decreased insider trade profitability and reduction of private information accessibility. The effects of liberalization are particularly pronounced for firms with high information asymmetry and weak corporate governance, non-state-owned enterprises (non-SOEs), and those located in regions with a high marketization level. Our findings also show a similar pattern of insider purchases, which mitigates the potential concern of insider update beliefs. Overall, we highlight the market-oriented discipline role played by foreign investors and the beneficial resultant of capital market liberalization; we also provide direct implications to policy makers and other emerging countries who aim to liberalize their capital markets.

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.

Are All Directors Treated Equally? Evidence from Director Turnover Following Opportunistic Insider Selling

This study investigates the likelihood of director turnover following opportunistic insider selling. Given that opportunistic insider selling may be costly to a firm due to potential legal risk and firm legitimacy concerns, we hypothesize that directors engaging in this type of transactions have a higher likelihood of subsequently leaving the board. Using archival data of 11,409 directors in 2280 US firms from 2005 to 2014, univariate comparisons show that directors engaging in opportunistic insider selling are about 8% more likely to exit their firms’ board compared to directors not engaging in this behavior. Furthermore, multivariate results show that the likelihood of director departure following opportunistic insider selling is higher for some directors but not all. Specifically, directors who are especially valuable to the board or costly to replace do not seem to experience elevated levels of turnover. Interestingly, this difference in director turnover is only observed in smaller firms. We find that in larger firms, the likelihood of director turnover following opportunistic insider selling does not depend on director characteristics. As such, results seem to suggest that boards do not homogeneously self-regulate in this context as some directors seem to be shielded from turnover following unethical behavior.

Does Insider Trading Predict Market Returns? Evidence from Aggregate Opportunistic Insider Trades

Does Insider Trading Predict Market Returns? Evidence from Aggregate Opportunistic Insider Trades

Does Insider Trading Predict Market Returns? Evidence from Aggregate Opportunistic Insider Trades

Does Insider Trading Predict Market Returns? Evidence from Aggregate Opportunistic Insider Trades