Institutional Ownership and Insider Trading: Quasi-Experimental Evidence
56 Pages Posted: 24 Sep 2018
Date Written: April 6, 2018
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: Suggested Citation