Quasi-Indexer Ownership and Insider Trading: Evidence from Russell Index Reconstitutions

Posted: 5 May 2021

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

The Hong Kong Polytechnic University

Multiple version iconThere are 2 versions of this paper

Date Written: April 19, 2021

Abstract

Understanding the association between quasi-indexer ownership and insider trading is important given the externalities that insider trading can impose on shareholders, the importance of quasi-indexers in the capital markets, and their mixed monitoring incentives. The prior literature has produced an inconsistent set of results regarding this association. These results are difficult to interpret because the association between them is likely endogenous, and prior studies have not employed effective identification strategies to address this issue. In this study, we examine the effects of quasi-indexer institutional ownership on insider trading using the plausibly exogenous discontinuity in quasi-indexer ownership around the Russell 1000/2000 index cutoff. Using both regression discontinuity and instrumental variable research designs, we find higher quasi-indexer ownership leads to less insider trading (both buys and sells) and less profitable sell trades. The effects for sells are concentrated among insider trades that, ex ante, are more likely to be based on private information. Our evidence on the profitability of buys is mixed. In addition, we find firms with higher quasi-indexer ownership are more likely to have and/or more strictly enforce blackout policies. Overall, our results suggest that quasi-indexers can reduce the agency costs associated with insider trading through their direct and indirect monitoring activities.

Keywords: quasi-indexers, insider trading, blackout policies, causal effect, regression discontinuity

JEL Classification: G14, G23, G34, D82

Suggested Citation

Hillegeist, Stephen A. and Weng, Liwei, Quasi-Indexer Ownership and Insider Trading: Evidence from Russell Index Reconstitutions (April 19, 2021). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3837190

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

The Hong Kong Polytechnic University ( email )

School of Accounting and Finance
M701, Li Ka Shing Tower
Hong Kong
China
+852 2766-7053 (Phone)

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