Corporate Governance and the Profitability of Insider Trading

53 Pages Posted: 11 Jul 2012 Last revised: 13 Jun 2017

Lili Dai

University of New South Wales (UNSW) - School of Accounting

Renhui Fu

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management

Jun-Koo Kang

Nanyang Technological University (NTU) - Nanyang Business School

Inmoo Lee

KAIST College of Business

Date Written: August 22, 2016

Abstract

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

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

Lili Dai

University of New South Wales (UNSW) - School of Accounting ( email )

Room 3094
Quadrangle Building, UNSW Sydney
Sydney, NSW 2052
Australia

HOME PAGE: http://sites.google.com/site/ldaiprofile

Renhui Fu (Contact Author)

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management ( email )

1954 Huashan Road
Shanghai Jiao Tong University
Shanghai, Shanghai 200030
China
+862152301575 (Phone)

Jun-Koo Kang

Nanyang Technological University (NTU) - Nanyang Business School ( email )

Nanyang Avenue, Block S3-01b-54
Singapore, 639798
Singapore
(+65) 6790-5662 (Phone)
(+65) 6791-3697 (Fax)

HOME PAGE: http://www.nbs.ntu.edu.sg/nbs_corporate/divisions/bnf/index.asp

Inmoo Lee

KAIST College of Business ( email )

85 Hoegiro Dongdaemun-Gu
Seoul 130-722
Korea, Republic of (South Korea)

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