Insider Trading, Disclosure Incentives, and Stock Price Crashes: International Evidence

Abstract

This study first establishes a causal relation between insider trading and the likelihood of stock price crash occurrence, and then investigates potential channels through which the former influences the latter. Exploiting the initial enforcement of insider trading laws in a country as a natural experiment, we find that insider trading enforcement leads to a significant reduction in stock price crashes. We further show that this effect goes through three channels, i.e., the investor protection channel, the information environment channel, and the corporate governance channel. Our results support the view that insider trading motivates managers to hoard bad news but are not consistent with the information uncertainty argument in Marin and Olivier (2008).

Keywords: Insider Trading; Managerial Disclosure; Stock Price Crash Risk; Bad News Hoarding

JEL Classification: D82, G15, G38