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A Proclivity to Cheat: How Culture Influences Illegal Insider TradingAlireza Tourani RadAuckland University of Technology - Faculty of Business & Law Bart FrijnsAuckland University of Technology - Faculty of Business & Law Aaron B. GilbertAuckland University of Technology - Faculty of Business & Law December 14, 2011 2012 Financial Markets & Corporate Governance Conference 25th Australasian Finance and Banking Conference 2012 Abstract: We examine the role of culture on the prevalence of illegal insider trading. Recent literature suggests that decisions and actions of economic decision-makers, including CEOs and managers, are influenced by behavioural biases (Shefrin, 2007). We hypothesize that nations where individuals are more risk-averse and less individualistic engage in less illegal insider trading. We employ the uncertainty avoidance and individualism cultural dimensions of Hofstede (2001) as a proxy for culture. Using price run ups and abnormal volume data, as a proxy for illegal insider trading, from 7,853 target firms in 28 countries for the period January 1990 to August 2008, we show that uncertainty avoidance, a country-level proxy for risk aversion, is negatively related to insider trading, while individualism appears to have less connection with insider trading. Our findings suggest that law makers may need to consider cultural aspects within a country when developing insider trading laws.
Number of Pages in PDF File: 27 Keywords: Cultural Dimensions, Insider Dealing, Price Run-Ups JEL Classification: K22, G15, G38 working papers seriesDate posted: December 15, 2011 ; Last revised: August 17, 2012Suggested CitationContact Information
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