Do Foreign Institutional Investors Deter Opportunistic Insider Trading?

58 Pages Posted: 6 Sep 2018 Last revised: 11 Jun 2019

See all articles by Claire Yurong Hong

Claire Yurong Hong

Shanghai Advanced Institute of Finance

Frank Weikai Li

Singapore Management University - Lee Kong Chian School of Business

Qifei Zhu

Nanyang Technological University (NTU) - Nanyang Business School

Date Written: June 2019

Abstract

We examine whether foreign investors play a role in mitigating opportunistic insider trading. Using a novel global insider trading dataset containing 35,557 firms from 26 countries, we find that greater foreign institutional ownership significantly reduces insider trading profitability, above and beyond the effect of domestic institutional ownership. Using the exogenous variation in foreign institutional ownership induced by MSCI index reconstitution, we show that this effect is plausibly causal. Foreign institutions mitigate insider trading both by direct monitoring on insiders' illicit behavior and by facilitating short selling through security lending.

Keywords: Foreign Institutional Ownership, Insider Trading, Monitoring

JEL Classification: G14, G34, K22

Suggested Citation

Hong, Claire Yurong and Li, Frank Weikai and Zhu, Qifei, Do Foreign Institutional Investors Deter Opportunistic Insider Trading? (June 2019). Available at SSRN: https://ssrn.com/abstract=3239075 or http://dx.doi.org/10.2139/ssrn.3239075

Claire Yurong Hong

Shanghai Advanced Institute of Finance ( email )

211 West Huaihai Road
Shanghai, China
Shanghai, Shanghai 200030
China

HOME PAGE: http://https://sites.google.com/site/claireyuronghong/

Frank Weikai Li

Singapore Management University - Lee Kong Chian School of Business ( email )

469 Bukit Timah Road
Singapore 912409
Singapore

Qifei Zhu (Contact Author)

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

Singapore, 639798
Singapore

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