Internal Corporate Governance and Insider Trading
Australian National University (ANU)
Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management
Nanyang Technological University (NTU) - Nanyang Business School
Korea Advanced Institute of Science and Technology (KAIST)
July 14, 2013
This paper examines the role of internal corporate governance in limiting insiders’ ability to profit from their information advantage. Using various measures that capture the quality of a firm’s internal governance, we find that compared with insiders of poorer-governed firms, those of better-governed firms earn significantly smaller abnormal profits from their sales transactions, but not from their purchase transactions. We also find that these asymmetric effects of internal governance on the profitability of insider trading are stronger for firms with more monitoring needs. Moreover, better-governed firms are more likely to place ex-ante preventive measures, such as voluntary insider trading policies, to restrict insider trading and take ex-post disciplinary actions against CEOs who earn large abnormal profits from their insider sales transactions. We further find that good governance restricts insiders’ use of private information but not that of public information.
Number of Pages in PDF File: 61
Keywords: Internal corporate governance, Insider purchases, Insider sales, Profitability of insider trading
JEL Classification: G34, J33, K31, M52
Date posted: July 11, 2012 ; Last revised: July 15, 2013
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