IQ and corporate insiders’ decisions to time insider and outsider trading

We examine how corporate insiders’ cognitive ability (IQ) affects their decisions to time insider and outsider trading before abnormal stock price changes. Our analysis of archival data on male corporate insiders in Sweden shows they are less prone to time their insider selling and to sell in larger amounts, before abnormal stock price declines as IQ increases. We also find that insiders with a higher IQ are better at timing their outsider buying. Taken together, our results show that corporate insiders’ IQ affects their trading decisions differently, depending on whether they are trading in their insider or outsider stocks.     

Do commonalities facilitate private information channels? Evidence from common gender and insider trading

We examine insider trading profitability and common identity between insiders and top executives. We argue that common gender and the resulting social connections influence access to private information, wherby insiders benefit from greater information-sharing with top executives of the same gender. Using a large sample of US firms between 1995 and 2016, we find higher (lower) insider trading profitability for female (male) insiders in the presence of a female CEO or CFO. We also find that, in isolation, other social and professional commonalities, such as age, ethnicity, having attended the same university or having worked at the same firm also increase insider profitability, albeit to a lesser extent. Our evidence suggests that some of these commonalities enhance the common gender effect when combined with it. We examine formal interactions and find that attending meetings and serving on committees with top executives of the same gender enables private information-sharing, consistent with gender acting as an informational channel. We also document greater clustering of insiders' trades around the trades made by common gender top executives. Our findings are consistent with flows of private information from CEOs and CFOs to less informed common gender insiders.     

Insider trading in takeover targets

We examine open market stock trades by registered insiders in about 3700 targets of takeovers announced during 1988–2006 and in a control sample of non-targets, both during an ‘informed’ and a control period. Using difference-in-differences regressions of several insider trading measures, we find no evidence that insiders increase their purchases before takeover announcements; instead, they decrease them. But while insiders reduce their purchases below normal levels, they reduce their sales even more, thus increasing their net purchases. This ‘passive’ insider trading holds for each of the five insider groups we examine, for all three measures of net purchases, and is more pronounced in certain sub-samples with less uncertainty about takeover completion, such as friendly deals, and deals with a single bidder, domestic acquirer, or less regulated target. The magnitude of the increase in the dollar value of net purchases is quite substantial, about 50% relative to their usual levels, for targets' officers and directors in the six-month pre-announcement period. Our finding of widespread profitable passive trading by target insiders during takeover negotiations points to the limits of insider trading regulation. Finally, our finding that registered insiders of target firms largely refrain from profitable active trading before takeover announcements contrasts with prior findings that insiders engage in such trading before announcements of other important corporate events, and points to the effectiveness of private over public enforcement of insider trading regulations.     

Insider Trading and Corporate Information Transparency

Our study examines the relation between insider trading and corporate information transparency. We find a negative relation between firms’ information transparency and the economic significance of insider trading, including the amount of insider purchase and sale and the profitability of insider transactions. We also find a negative relation between information transparency and stock price reaction to news of insider trading, which suggests that increases in information transparency preempt insiders’ private information. Our study provides evidence consistent with firms’ transparency-enhancing activities decreasing information asymmetry between insiders and investors by revealing insiders’ private information to investors in a timely manner.     

Does common ownership constrain managerial rent extraction? Evidence from insider trading profitability

This study identifies a new economic benefit of common institutional ownership, which refers to the increasingly contentious phenomenon of U.S. firms sharing stockholders with their industry competitors. We find a significantly negative relation between common ownership and insider trading profitability. The disciplinary effect of common ownership on opportunistic insider trading is particularly evident when the information effects of common ownership are greater, when common owners are more likely to benefit from positive governance externalities, and in the subset of trades made by opportunistic insiders. Using the exogenous variations in common ownership induced by financial institution mergers, we conduct a difference-in-differences analysis and find consistent results. We also provide evidence that common owners encourage firms to impose ex-ante restrictions on insider trading and take ex-post actions to discipline opportunistic insiders by voting against management. Overall, our findings suggest that common institutional shareholders have information advantages, governance incentives, and effective means to constrain opportunistic insider trading.     

Tax noncompliance and insider trading

This paper explores whether insiders who have shown noncompliance with the tax law (‘noncompliant insiders’) are more prone to exploit their information advantage in insider trading, compared to other insiders (‘compliant insiders’). Our empirical results from analyzing archival data of all insider trades in Sweden show that noncompliant insiders use more of their information advantage to trade their insider stocks shortly before significant stock price changes, compared to compliant insiders. These results remain similar after controlling for various insider- and firm-specific determinants of insider returns, including firm and year fixed effects. We believe that our results are of interest for academics and regulatory authorities monitoring and screening insider trading activity.     

Trading by bank insiders before and during the 2007–2008 financial crisis

This paper sheds new light on the role bank executives played in the financial crisis. It examines whether they foresaw the poor performance of their own bank by analyzing their insider trading patterns. Insider trading during 2006 predicts stock returns during the crisis: a portfolio strategy based on insider trading information earns a risk-adjusted return of over 40% during the crisis. Further, banks with a high exposure to the housing market and banks with a low exposure exhibit different insider trading patterns starting in mid-2006, when US housing prices first decline: insiders of high-exposure banks are 20% more likely to sell stock than insiders of low-exposure banks. This pattern is more pronounced for CEOs than other insiders. However, insider trading patterns of high- and low-exposure banks do not differ before 2006. Replacing high-exposure banks by too-big-too-fail banks yields similar results. This evidence indicates that insiders of high-exposure and too-big-too-fail banks revised their assessment of their banks’ investments following the reversal in the housing market.     

The Relation Between Insider-Trading Restrictions and Executive Compensation

In this study I investigate the relation between firm‐level insider‐trading restrictions and executive compensation. Using a trading‐window proxy for the existence of such restrictions, I test predictions that insiders will demand compensation for these restrictions and that firms will need to increase incentives to restricted insiders. I find that firms that restrict insider trading pay a premium in total compensation relative to firms not restricting insider trading, after controlling for economic determinants of pay. Furthermore, these firms use more incentive‐based compensation and their insiders hold larger equity incentives relative to firms that do not restrict insider trading. These results hold after controlling for the endogenous decision to restrict insiders and are consistent with the notion that insider trading plays a role in rewarding and motivating executives.     

Why do insiders trade? Evidence based on unique data on Swedish insiders

In this paper, we examine if corporate insiders have other motives for trading besides exploitation of private information. Our results show that insiders’ portfolio re-balancing objectives, tax considerations and behavioral biases play the most important role in their trading decisions. We also find that insiders who have allocated a great (small) proportion of their wealth to insider stock sell more (less) before bad news earnings disclosures. Finally, insider selling is informative for future returns among those insiders who have the greatest proportion of wealth allocated to insider stocks.     

Do voluntary corporate restrictions on insider trading eliminate informed insider trading?

We investigate whether voluntary corporate restrictions on insider trading effectively prevent insiders from exploiting their private information. Our results show that insiders of firms with seeming restrictions on insider trading continue to take advantage of positive private information while being more cautious when exploiting negative private information. The results suggest that insiders continue to exploit their informational advantages in a way that minimizes their legal risk. We also find that the degree of information asymmetry is significantly lower in firms with restriction policies and that corporate governance significantly affects firms' decisions to adopt these policies.     

卖空机制能够约束内部人减持吗？——基于融资融券制度的经验证据

本文以我国放松卖空管制为视角,探究其对内部人减持的影响。研究表明,卖空机制能够抑制企业内部人减持行为。机制分析发现,卖空对内部人减持的抑制作用是通过缓解股权高溢价实现的。进一步研究表明,卖空能够抑制大股东、董事以及管理层减持,但对监事减持无影响;卖空能够降低内部人减持的获利程度,并且在内部人减持动机更大时,对内部人减持的抑制作用更强;卖空通过约束内部人减持提升了股票定价效率,还有助于降低内部人增持行为。本文的研究结论丰富了卖空和内部人减持领域的文献,并对政府部门完善制度设计具有启示意义。     

Insider Trading and Voluntary Disclosures

We hypothesize that insiders strategically choose disclosure policies and the timing of their equity trades to maximize trading profits, subject to the litigation costs associated with disclosure and insider trading. Accounting for endogeneity between disclosures and trading, we find that when managers plan to purchase shares, they increase the number of bad news forecasts to reduce the purchase price. In addition, this relation is stronger for trades initiated by chief executive officers than for those initiated by other executives. Confirming this strategic behavior, we find that managers successfully time their trades around bad news forecasts, buying fewer shares beforehand and more afterwards. We do not find that managers adjust their forecasting activity when they are selling shares, consistent with higher litigation concerns associated with insider sales. Overall, our evidence suggests that insiders do exploit voluntary disclosure opportunities for personal gain, but only selectively, when litigation risk is sufficiently low.     

Insider Trading in the OTC Market

In this paper, we examine the profitability of insider trading in firms whose securities trade in the OTC/NASDAQ market. Although the evidence suggests timing and forecasting ability on the part of insiders, high transaction costs (especially bid-ask spreads) appear to eliminate the potential for positive abnormal returns from active trading. By implication, outside investors who mimic the trading of insiders are also precluded from earning abnormal profits. In addition, we provide evidence on the determinants of insiders' profits. The data suggest that insiders closer to the firm trade on more valuable information than insiders removed from the firm.     

Do insiders trade on government subsidies?

We examine whether and how insiders trade on government subsidies, a major instrument through which the governments intervene in the economy. Using a novel dataset of government subsidies of Chinese listed firms, we find that net insider purchase increases significantly during the month of subsidy receipt. The effect of subsidies on insider trading is weaker in firms with a more transparent information environment and when subsidies are granted in a more predictable manner. In contrast, the effect is more pronounced for politically connected firms. Further analysis shows that the subsidy-trading relation may reflect both insiders’ informational advantage concerning subsidies and their superior ability to detect mispricing-related opportunities. Our findings provide new insights into the capital market consequences of government subsidies through the lens of insider trading.     

Insider-trading,discretionary accruals and information asymmetry

Using US data for the period from 2004 to 2012 and alternative discretionary accruals measures, we examine whether insiders manipulate earnings in an asymmetric information environment to profit from their informed trades, and whether the intervening information environment influences the relationship between earnings management and insider trading. We show that insider trading dominated by sell trades has a positive association with discretionary accruals. The incremental effect of information asymmetry as well as the interaction with insider trading is also prevalent in this relation, confirming the moderating effect of asymmetric information. Further, we show that the active involvement of some key insiders in high discretionary accruals is for personal benefit more in growth firms than in value firms. Our results also suggest that earnings management allows for insiders’ opportunistic, rather than routine, buy and sell trades. Our findings highlight that regulators should oversee and scrutinise both insider trading and earnings management to mitigate the risk of the opportunistic behaviour of insiders to avoid future corporate scandals.     

THE EFFECTS OF INSIDER TRADING RESTRICTIONS: EVIDENCE FROM HISTORICAL DIVIDEND INITIATIONS AND OMISSIONS

We investigate whether insider trading restrictions had their intended effects during the 1960s and 1970s. We examine insider trading and stock market behavior before dividend initiations and omissions announced between 1935 and 1974. Contrary to existing research and commentary, we show that restrictions had meaningful effects. During the 1960s and 1970s, insiders sold less frequently before dividend omissions, and the average profitability of insider trades declined. In addition, the positive (negative) stock price runup before dividend initiations (omissions) decreased after 1961. The results provide some vindication for the Securities and Exchange Commission's adjudicative approach toward insider trading regulation.     

Corporate Governance and the Information Content of Insider Trades

Most corporate governance research focuses on the behavior of chief executive officers, board members, institutional shareholders, and other similar parties. Little research focuses on the impact of executives whose primary responsibility is to enforce and shape corporate governance inside the firm. This study examines the role of the general counsel (GC) in mitigating informed trading by corporate insiders. We find that insider trading profits and the predictive ability of insider trades for future operating performance are generally higher when insiders trade within firm‐imposed restricted trade windows. However, when GC approval is required to execute a trade, insiders’ trading profits and the predictive ability of insider trades for future operating performance are substantively lower. Thus, when given the authority, it appears the GC can effectively limit the extent to which corporate insiders use their private information to extract rents from shareholders.     

Insider transfer trading of banking companies around exchange listing

This paper examines insider transfer trading of banking companies before and after their listing on the Taiwan Stock Exchange. During the pre-listing period, we uncover significantly negative abnormal returns after insiders announce their plans to transfer stocks, as well as significant price reversals following the subsequent disclosure of unfulfilled transfers. However, after listing, we observe little market response to the initial announcement, and nor is any price revision observed for partial/no transfer information. For both periods, the substantial increases in turnover provide further evidence on the flow of information from insider trading. Additionally, the propensity and profitability of insider transfers are documented. Overall, empirical results indicate that dissemination of information on insider transfer trading before listing can negatively influence the stock price, while information on insider transfers posted after listing attracts only limited attention. Consequently, the evidence is consistent with the implications associated with the managerial timing of listing decisions.     

Insider trading in rumored takeover targets

We examine insider trading surrounding takeover rumors in a sample of 1,642 publicly traded US firms. Using difference-in-differences regressions, we find that insider net purchases increase within the year prior to the first publication of a takeover rumor, particularly when rumor articles are either accurate (lead to a takeover announcement) or informative (provide substantial justification for the rumor's publication). Moreover, we find abnormal insider trading to be a significant predictor of takeover announcements occurring within the following year. Finally, passive net purchasing (i.e., selling less rather than buying more) is more pronounced among managing insiders than among non-managing insiders.     

Strategic insider trading in foreign exchange markets

Inside traders are well-documented to leverage private idiosyncratic information for personal gain in centralized exchanges such as stock markets. Evidence is rare, however, for decentralized and fragmented over-the-counter markets with microstructure properties that make them particularly vulnerable to stealth trading. The 2015 criminal conviction of Hill and Kamay for foreign exchange insider trading is the first in over-the-counter markets. We analyze their actions to show the complex, strategic decision-making of insiders even in opaque markets where they run a low risk of detection and prosecution: they trade when the market is most sensitive to local information, carefully choose and time their trades to minimize the risk of confounding information disclosures that may affect their profits, as well as act during high noise trading to mask their trades. Our results are consistent with evidence on insider trading in stock markets. We highlight the limitations of regulatory control in over-the-counter markets where technology-based surveillance methods are ineffective, while reinforcing the importance of whistleblowers in detecting and preventing insider trading.