Religion and Insider Trading Profits
69 Pages Posted: 9 Aug 2019 Last revised: 11 Jul 2022
Date Written: October 12, 2020
We use the controversial aspect of insider trading to analyze the impact of local social norms on insiders’ profits. We argue that religiosity is a source of social norms curbing self-interested behavior and, accordingly, it limits corporate insiders’ opportunistic trading on private information. Our results confirm that trades by insiders in firms located in more religious areas are followed by lower abnormal returns, those insiders are less likely to trade on future earnings news, and their trades are less likely to be opportunistic. The effect of religion on insider trading holds across different levels of disclosure environments and is more pronounced in firms with poor corporate governance - in firms without firm-level voluntary insider trading restrictions and in firms with higher number of co-opted independent directors. The effect is evident when insiders move from less to more religious areas and is concentrated where the impact of local social norms is also expected to be stronger – in geographically focused firms. Higher religiosity also decreases the probability and volume of trading. We provide several tests to address potential endogeneity and to strengthen identification. Overall, we offer new insights into the effect of social norms on individuals’ financial decisions.
Keywords: religion, social norms, insider trading, profits, opportunism
JEL Classification: G14, G41, Z12
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