Do Foreign Institutional Investors Deter Opportunistic Insider Trading?
73 Pages Posted: 6 Sep 2018 Last revised: 8 Sep 2020
Date Written: October 16, 2019
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: Suggested Citation