Internal Corporate Governance and the Profitability of 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)
September 16, 2015
This paper examines how internal governance systems limit insiders’ ability to profit from their information advantage. We find that compared with insiders of poorer-governed firms, insiders of better-governed firms earn significantly smaller abnormal profits from their sales transactions but not from their purchase transactions. This governance effect is more pronounced in firms with greater litigation risk. Moreover, better-governed firms are more likely to put in place ex-ante preventive measures (e.g., voluntary insider trading restriction policies) and to implement such measures more effectively, and are more active in taking ex-post disciplinary actions against CEOs who earn large abnormal profits from their sales transactions.
Number of Pages in PDF File: 55
Keywords: Internal corporate governance; Insider purchases; Insider sales; Profitability of insider trading; Legal risk
JEL Classification: G34, J33, K31, M52, K22
Date posted: July 11, 2012 ; Last revised: September 16, 2015
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