Monitoring from Afar: Do Foreign Institutional Investors Deter Insider Trading?

62 Pages Posted: 6 Sep 2018 Last revised: 15 Nov 2018

See all articles by Claire Hong

Claire 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: August 26, 2018

Abstract

This paper examines the disciplinary effect of foreign institutional investors on opportunistic insider trading. Using a novel global insider trading data set containing 35,557 firms from 26 countries over the period 2000-2015, we find that greater foreign institutional ownership significantly reduces the profitability of insider trading, above and beyond the effect of domestic institutional ownership. Using the exogenous variation in foreign institutional ownership induced by MSCI index inclusion, we show that the effect is causal. The impact of foreign investors is stronger in countries with weak insider trading regulations and poor institutional environments, and operates mainly through the monitoring channel, rather than the channel of improved information environments.

Keywords: Foreign Institutional Ownership, Insider Trading, Monitoring

JEL Classification: G14, G34, K22

Suggested Citation

Hong, Claire and Li, Frank Weikai and Zhu, Qifei, Monitoring from Afar: Do Foreign Institutional Investors Deter Insider Trading? (August 26, 2018). Available at SSRN: https://ssrn.com/abstract=3239075 or http://dx.doi.org/10.2139/ssrn.3239075

Claire 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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