Does Social Trust Mitigate Insiders’ Opportunistic Behavior? Evidence from Insider Trading

72 Pages Posted: 4 Aug 2021 Last revised: 13 Jan 2022

See all articles by Panpan Fu

Panpan Fu

Hunan University - School of Finance and Statistics

Chaoqun Ma

Hunan University - Business School

Yonggang Tian

Hunan University - College of Business Adminstration

Xiuhua Wang

Hunan University - School of Finance and Statistics

Date Written: July 15, 2021

Abstract

Does social trust restrain or exacerbate opportunistic behaviors of corporate insiders? On the one hand, insiders who are susceptible to a high trust environment surrounding them will be less opportunistic; on the other hand, unethical insiders may exploit high trust people to engage in more opportunistic behaviors. In this paper, we test the two competing hypotheses by investigating how trust surrounding corporate headquarters affects insider trading profitability under the assumption that opportunistically informed trades are with higher trading profits. We show that social trust negatively affects insiders’ trading gains. This relation holds after instrumental variable regressions and a difference-in-difference framework. Additionally, the role of trust is more prominent when insiders face more trading opportunities arising from information asymmetry, weak monitoring, and concentrated ownership structure, but attenuates when formal regulations are in place. We also examine the indirect channels including cautious financial reports, informative disclosure, and active communications with investors through which social trust can deter informed trading. Overall, our evidence suggests that social trust can discourage opportunistic proclivity and spur ethical deeds among managers.

JEL Classification: A13, G10, G14, G30, M14

Suggested Citation

Fu, Panpan and Ma, Chaoqun and Tian, Yonggang and Wang, Xiuhua, Does Social Trust Mitigate Insiders’ Opportunistic Behavior? Evidence from Insider Trading (July 15, 2021). Available at SSRN: https://ssrn.com/abstract=3897679 or http://dx.doi.org/10.2139/ssrn.3897679

Panpan Fu

Hunan University - School of Finance and Statistics ( email )

Shijiachong Road 109#
Changsha, Hunan 410079
China

Chaoqun Ma

Hunan University - Business School ( email )

Changsha, Hunan 410082
China

Yonggang Tian (Contact Author)

Hunan University - College of Business Adminstration ( email )

No.11 Lushan South Road
Changsha, Hunan 410081
China

Xiuhua Wang

Hunan University - School of Finance and Statistics

Shijiachong Road 109#
Changsha, Hunan 410079
China

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
104
Abstract Views
550
Rank
384,032
PlumX Metrics