A Proclivity to Cheat: How Culture influences Illegal Insider Trading

Abstract

Insider trading has been subjected to increasing sanctions in many markets without completely deterring insider dealing or even, on the basis of some evidence, making it more prevalent. This suggests that other factors may impact on the prevalence of insider dealing such as culture, a system of norms and values which may enhance or undermine the laws in place. We examine the impact of culture by relating the four Hofstede (2001) cultural dimensions to the price and volume run-ups prior to a takeover announcement. Our results show that higher uncertainty avoidance, a proxy for risk aversion, deters insider dealing, although other cultural dimensions show little connection with insider trading. Our findings suggest that law makers may need to consider culture when establishing insider trading laws, specifically, stronger sanctions in low uncertainty avoiding countries.

Keywords: Cultural Dimensions, Insider Dealing, Price Run-Ups

JEL Classification: G34, Z10, C21