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
KAIST College of Business
August 22, 2016
Journal of Corporate Finance, Forthcoming
This paper examines the influence of corporate governance systems on insiders’ ability to profit from their information advantage and the ways through which corporate governance systems influence such ability. We find that corporate governance significantly reduces the profitability of insider sales but not that of insider purchases. Given that sales involve greater legal risk than purchases, the results suggest that well-governed firms restrict informed insider trading mainly to reduce legal risk. We also find that better-governed firms reduce the profitability of insider sales by increasing the likelihood of adopting ex-ante preventive measures (e.g., voluntary insider trading restriction policies), implementing such measures more effectively, and taking ex-post disciplinary actions more actively. These results highlight how better-governed firms are able to restrict insiders from exploiting private information.
Number of Pages in PDF File: 53
Keywords: Corporate governance; Insider purchases; Insider sales; Profitability of insider trading; Legal risk
JEL Classification: G34, K22
Date posted: July 11, 2012 ; Last revised: August 23, 2016
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