Corporate Governance and the Information Content of Insider Trades

Journal of Accounting Research 49 (Dec 2011): 1249-1274.

Rock Center for Corporate Governance at Stanford University Working Paper No. 3

42 Pages Posted: 29 May 2008 Last revised: 6 Nov 2012

Alan D. Jagolinzer

University of Colorado - Leeds School of Business

David F. Larcker

Stanford University - Graduate School of Business

Daniel J. Taylor

University of Pennsylvania - The Wharton School

Date Written: June 1, 2011

Abstract

Most corporate governance research focuses on the behavior of chief executive officers, board members,institutional shareholders, and other similar parties. Little research focuses on the impact of executives whose primary responsibility is to enforce and shape corporate governance inside the firm. This study examines the role of the general counsel in mitigating informed trading by corporate insiders. We find that insider trading profits and the predictive ability of insider trades for future operating performance are generally higher when insiders trade within firm-imposed restricted trade windows. However, when general counsel approval is required to execute a trade,insiders’ trading profits and the predictive ability of insider trades for future operating performance are substantively lower. Thus, when given the authority, it appears the general counsel can effectively limit the extent to which corporate insiders use their private information to extract rents from shareholders.

Keywords: corporate governance, insider trading, insider trading policies, general counsel, restricted trade windows

JEL Classification: G34, J33, K31, M52

Suggested Citation

Jagolinzer, Alan D. and Larcker, David F. and Taylor, Daniel J., Corporate Governance and the Information Content of Insider Trades (June 1, 2011). Journal of Accounting Research 49 (Dec 2011): 1249-1274.; Rock Center for Corporate Governance at Stanford University Working Paper No. 3. Available at SSRN: https://ssrn.com/abstract=1138723

Alan D. Jagolinzer

University of Colorado - Leeds School of Business ( email )

419 UCB
Boulder, CO 80309-0419
United States

David F. Larcker (Contact Author)

Stanford University - Graduate School of Business ( email )

Graduate School of Business
518 Memorial Way
Stanford, CA 94305-5015
United States
650-725-6159 (Phone)

Daniel Taylor

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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