Institutional Ownership and Insider Trading: Quasi-Experimental Evidence

56 Pages Posted: 24 Sep 2018

See all articles by Stephen A. Hillegeist

Stephen A. Hillegeist

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

Liwei Weng

Arizona State University (ASU) - School of Accountancy

Date Written: April 6, 2018

Abstract

We examine the causal effect of institutional ownership on insider trading using a regression discontinuity design to analyze exogenous differences in institutional ownership around Russell Index reconstitutions. Our findings indicate institutional investors influence insider trading behavior. Higher institutional ownership leads to fewer insider trades overall (both buys and sells) and less profitable sell trades. Further analyses indicate the reductions in trading frequency are concentrated in opportunistic, as opposed to routine, insider trades. Our findings differ from those in prior literature, which likely suffers from endogeneity issues. We also provide evidence on one potential mechanism through which institutions’ preferences on insider trading are instituted. We find firms with higher levels of institutional ownership are significantly more likely to have and/or more strictly enforce blackout policies, which limit trades by insiders to certain periods. These findings provide new insights on how institutional investors function as external monitors. Overall, our results suggest institutions generally view privately informed insider trading as undesirable and use their influence to mitigate it.

Keywords: Institutional Investors, Insider Trading, Blackout Policies, Causal Effect, Regression Discontinuity

JEL Classification: G14, G23, G34, D82

Suggested Citation

Hillegeist, Stephen A. and Weng, Liwei, Institutional Ownership and Insider Trading: Quasi-Experimental Evidence (April 6, 2018). Available at SSRN: https://ssrn.com/abstract=3244627 or http://dx.doi.org/10.2139/ssrn.3244627

Stephen A. Hillegeist (Contact Author)

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

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

Liwei Weng

Arizona State University (ASU) - School of Accountancy ( email )

Tempe, AZ 85287
United States

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