Do They Do It for the Money?

Abstract:     
Using a sample of all top management who were convicted of illegal insider trading in the United States for trades during the period 1989-2002, we explore the economic rationality of this white-collar crime. If this crime is an economically rational activity in the sense of Becker (1968), where a crime is committed if its expected benefits exceeds its expected costs, we should see poorer top management doing the most illegal insider trading. This is because the expected costs of insider trading (loss of reputation and future wages if they are caught) are lower for the poorer strata. We find in the data, however, that convictions are concentrated in the richer strata in a cohort group, where cohort is defined by firm size and industry. Our results remain after we control for the expected benefits of illegal insider trading. Our results also remain after we control for the obvious alternate explanation: it is not the richer strata that do illegal insider trading, but that the regulators target the richer strata. We thus cannot rule out psychological motives (like hubris) or sociological motives (like company culture) behind this white-collar crime.

Keywords: white-collar crime, insider trading, SEC enforcement, CEO compensation

JEL Classifications: G14, G18, G34, G38

Working Paper Series