53 Pages Posted: 11 Jul 2012 Last revised: 13 Jun 2017
Date Written: August 22, 2016
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.
Keywords: Corporate Governance; Insider Purchases; Insider Sales; Profitability of Insider Trading; Legal Risk
JEL Classification: G34, K22
Suggested Citation: Suggested Citation
Dai, Lili and Fu, Renhui and Kang , Jun-Koo and Lee, Inmoo, Corporate Governance and the Profitability of Insider Trading (August 22, 2016). Journal of Corporate Finance 40: 235–253, 2016. Available at SSRN: https://ssrn.com/abstract=2103523 or http://dx.doi.org/10.2139/ssrn.2103523
By Jesse Fried