Do Proprietary Costs Deter Insider Trading?

60 Pages Posted: 13 Jul 2017 Last revised: 8 Jul 2020

See all articles by Lyungmae Choi

Lyungmae Choi

City University of Hong Kong (CityUHK)

Lucile Faurel

Arizona State University

Stephen A. Hillegeist

Arizona State University (ASU) - W. P. Carey School of Business, School of Accountancy

Date Written: July 7, 2020

Abstract

Insider trading conveys insiders’ private information to outsiders. This private information potentially benefits rival firms, which may reduce the competitive advantage of the insiders’ firms. Using multiple approaches to identify proprietary information risk, we find proprietary costs are negatively associated with insiders’ purchases, especially when insider trades are more likely to be informative to rivals. Consistent with proprietary information risk increasing the costs of insider purchases and, hence, the required benefits to trade, insiders earn significantly higher abnormal profits when proprietary costs are higher. Exploiting settings with exogenous and event-driven variation in proprietary costs, we find insiders significantly reduce their purchases when noncompete agreement enforceability is high and before new product launches. Finally, firms with higher proprietary costs are more likely to impose trading window-based insider trading restrictions. Our findings indicate insiders and firms are aware of potential proprietary costs when insiders trade on private information, and they respond accordingly.

Keywords: Insider trading, proprietary costs, product market competition

JEL Classification: G14, M41

Suggested Citation

Choi, Lyungmae and Faurel, Lucile and Hillegeist, Stephen A., Do Proprietary Costs Deter Insider Trading? (July 7, 2020). Available at SSRN: https://ssrn.com/abstract=2999810 or http://dx.doi.org/10.2139/ssrn.2999810

Lyungmae Choi (Contact Author)

City University of Hong Kong (CityUHK) ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

Lucile Faurel

Arizona State University ( email )

W.P. Carey School of Business
School of Accountancy, B267H
Tempe, AZ 85287
United States
(480) 965-6216 (Phone)

Stephen A. Hillegeist

Arizona State University (ASU) - W. P. Carey School of Business, School of Accountancy ( email )

Tempe, AZ 85287-3706
United States
480-965-6614 (Phone)

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