Does stronger corporate governance constrain insider trading? Asymmetric evidence from Australia

We investigate the role of internal corporate governance in limiting opportunities for ASX company ‘insiders’ to extract abnormal returns from trading ‘own shares’. We show that stronger governance translates into more restrictive insider trading policies and, while not resulting in lower insider purchase volumes, values or profits, it does reduce insider selling profitability. Firm size and increasing trading policy restrictiveness is associated with reduced insider purchase profitability while insider sale profitability is reduced by aggregate governance, trading restrictions and increasing trading policy restrictiveness. We conclude that internal firm governance constrains insider sales but not purchases, providing contrarian trading signals.     

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.     

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.     

Short sellers and insider trading profitability: A natural experiment

We examine the impact of short sellers on insider trading profitability using a natural experiment of a pilot program which relaxed short-selling constraints for randomly selected pilot stocks. We find that pilot firms experienced a significant decrease in insider trading profitability during the pilot program. The results are more pronounced for the pilot firms with poor information quality, and for the pilot firms without corporate restrictions on insider trading. Our evidence suggests that short sellers serve an important market disciplinary role by reducing insider trading profitability.     

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.     

Insider trading and shareholder investment horizons

This paper examines the effects of shareholder investment horizons on insider trading. We find that insiders are less likely to trade on private information and the profitability of insider trades is lower when shareholder investment horizons are longer. We further examine two channels through which shareholders with longer investment horizons can impede insider trading: direct monitoring and better information environment. Consistent with the direct monitoring channel, we show that insiders in firms with longer shareholder investment horizons are more likely to shift trades from the month right before earnings announcements to the month right after earnings announcements. Moreover, the impact of investment horizons are stronger in firms with higher ex ante litigation risk, with lower corporate governance quality, and that are not targets of hedge fund activists. Consistent with the information environment channel, we show that longer shareholder investment horizons increase the frequencies of information disclosure and insiders in firms with longer shareholder investment horizons are more likely to trade in an isolated manner rather than in sequences.     

Accounting conservatism and the profitability of corporate insiders

We predict that accounting conservatism influences insiders' opportunities to speculate on good and bad news, and thus, insider trading profitability. We find that greater conditional (unconditional) conservatism is associated with lower (higher) insiders' profitability from sales. We find limited evidence that conservatism influences profitability from purchases. These findings are consistent with our hypotheses on the different informational roles of conditional and unconditional conservatism, and on the asymmetric influence of conservatism over the opportunities to speculate on good versus bad news. Our research design takes into consideration the endogenous nature of insiders' trading and conservatism. The results are robust to different measures of conservatism and a number of additional analyses.     

Tone emphasis and insider trading

In this study, we examine whether emphasized tone in earnings releases systematically predict managers' insider trading activities in the post earnings releases periods and whether managers' choices of tone placement in earnings releases are motivated by opportunistic incentives. We find that, holding constant the net tone of the overall document, managers make more insider sales (purchases) immediately after earnings releases when positive (negative) tone is presented more prominently in the document. In addition, we document that the relation between tone emphasis and the observed insider trading activities is more (less) pronounced when insiders have greater information advantage or when a firm's overall information environment is more opaque (when a firm has better corporate governance). Overall, our findings suggest that managers use narrative characteristics strategically to facilitate their insider trading and achieve personal gains.     

The Persistence of Opportunistic Insider Trading

We study the drivers of persistent insider trading profitability by examining the trades of insiders whose past trades have been profitable. We find that the current transactions of these persistently profitable (PP) insiders better predict firm performance than those of other insiders. The relative abnormal performance is more pronounced for trades of insiders who are managers rather than large shareholders or unaffiliated insiders and for trades in firms with weaker governance and greater information asymmetry. The trades of PP insiders also better predict earnings surprises, major corporate news, and analyst revisions. Collectively, these results indicate that PP insider transactions provide valid signals regarding future firm performance and that persistence in profitability is driven by informational advantages.     

Internal information quality and financial policy peer effects

This paper investigates how firms' internal information quality (IIQ) influences the peer effects of their financial policies. Using earnings announcement speed and insider trading profitability difference as measurements, we find that when IIQ is low, firms are more likely to change their leverage following a similar change made by peer firms in the same industry. Our further analysis shows that this mimicking behavior hurts firms' operating performance, and is more prevalent when firms are also characterized by poor corporate governance. Overall, our results indicate that poor information quality could amplify the agency problem, therefore leading to stronger peer effects in corporate financial policies.     

Poison Pill Securities: Shareholder Wealth and Insider Trading

Existing empirical studies on poison pill securities have examined their overall effect on shareholder wealth. This paper segregates the wealth-increasing poison pills from the value-reducing ones by examining the pattern of insider trading activity prior to the pill adoption announcement. Our results show that pill adoptions that are preceded by net insider purchases are associated with significant stock price increases. This finding is consistent with the proposition that corporate insiders buy their own securities because they do not view the adoption of poison pills as an antitakeover strategy, but rather one that enables the board of directors to extract a greater share of the economic gains from the bidder. Our findings also indicate that firms with net insider sales prior to pill adoption announcement experience generally negative but insignificant changes in value. Finally, firms with no insider trading or with an equal number of insider purchases and sales register marginally significant negative returns.     

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.     

卖空者与内幕交易——来自中国证券市场的证据

本文研究上市公司内部人减持、年报、诉讼、分析师评级、停复牌以及高送转等重大公告前后卖空交易行为的变化,系统考察卖空者是否参与内幕交易以及何种因素影响卖空者参与内幕交易,发现卖空率较高的股票具有较低的未来收益,表明卖空者拥有信息优势,属知情交易者;卖空者拥有非常精确的择时交易能力,在重大利空公告前显著增加卖空量,而在利好公告前则显著减少卖空头寸,表明卖空者作为知情交易者的信息优势源自内幕消息;公司内、外部投资者的信息不对称程度越低或公司所在地的法治水平越高,卖空者参与内幕交易的行为就越少。因此,监管机构应密切关注公司重大消息发布前后卖空量的异常变动,同时,完善信息披露规则、健全证券分析师制度并强化法律法规的执行力度,才能有效防范卖空者参与内幕交易。     

Does exposure to product market competition influence insider trading profitability?

We examine whether and how product market competition affects insider trading profitability. We empirically show that the insiders of firms in highly competitive industries make higher abnormal profits. Our identification strategy includes both a quasi-natural experiment setting and an instrumental variable approach to address endogeneity concerns. We also run an extensive array of robustness checks and find that our baseline results remain substantially unchanged. Our cross-sectional analyses show that insider trading profitability is more pronounced for firms with: a higher level of trade secrecy, a higher level of R&D, a lower level of management voluntary disclosures, less readable 10-K reports and highly tone-ambiguous financial disclosures. We also find that our results are robust to the inclusion of corporate governance mechanisms. Overall, this study is consistent with the theoretical predictions that support the information asymmetry and proprietary cost channels of competition and that increases in competition lead insiders to undertake more rent-seeking activity.     

The informativeness and ability of independent multi-firm directors

Motivated by SEC regulations requiring a majority of independent directors on corporate boards, we examine director informativeness and ability by observing the trading performance of independent directors who serve on multiple boards. As a proxy for informativeness, we find positive trading performance relative to purchases and sales. More impressive, these performance opportunities appear to be available to market participants who observe directors' Form 4 trades. We do not find evidence that diversification motives or busyness affects director trading performance. On the other hand, we do find that audit and compensation committee memberships enhance director trading performance on the sales side but that committee membership does not affect the profitability of director purchases. In comparison, multi-firm directors out-perform single-firm directors and this performance differential seems to be more attributable to superior ability than to better information.     

The Information Content of Insider Call Options Trading

We examine the information content of two forms of insider trading, insider buy-, and sell-call transactions. We find that the information carried by stand-alone call purchases has only a short-term impact on stock prices, but over a longer term, call purchases accompanied by stock purchases have a positive impact. Call purchases accompanied by stock sales signal negative information about the firm, suggesting that some insiders use complicated trading strategies to manipulate the market. Insider sell-call transactions are followed by negative returns, indicating these transactions are driven by negative information about the firm.     

Do co-opted boards increase insider profitability?

Using a sample of U.S. firms over the period 1996–2014, this paper examines whether insider trading profitability increases with high board co-option. Indeed, we find that firms with a higher level of co-opted directors exhibit higher insider trading profitability, largely due to a lower level of managerial ability and analyst coverage. Co-opted boards are also unlikely to implement self-imposed insider trading restrictions, exacerbating this relationship. This positive association is mitigated by a higher level of external monitoring by institutional investors and if the CEO receives more performance-based incentives. Overall, co-opted directors demonstrate aligned interests with CEOs and corporate insiders rather than performing their role as monitors. As a result, a more co-opted board is positively associated with exploitative behaviour of insiders.     

Internal governance,legal institutions and bank loan contracting around the world

Using a sample of non-U.S. firms from 22 countries during 2003–2007, we examine the effect of firm-level governance on various features of loan contracting in the international loan market. We find that banks charge lower loan rates, offer larger and longer-maturity loans, and impose fewer restrictive covenants to better-governed firms. We also find that the favorable effect of firm-level governance on some loan contracting terms is stronger in countries with strong legal institutions than in countries with weak legal institutions. Our results suggest that banks view a borrower's internal governance as a factor that mitigates agency and information risk, and that country-level legal institutions and firm-level governance mechanisms complement each other in influencing loan contracting terms.     

Why does shareholder protection matter for abnormal returns after reported insider purchases and sales?

We use a unique data set of more than 240,000 reported insider transactions across 15 European countries and the USA to analyze the link between country-level shareholder protection and abnormal returns following insider trades. We show that abnormal returns after insider transactions are positively correlated with country-level shareholder protection against expropriation by corporate insiders, which supports the information-content hypothesis. Market reaction to insider purchases increases with shareholder protection because shareholder protection enhances the transparency and trustworthiness of insiders’ actions, and limits possibilities for direct profit diversion, so that more information is eventually reflected in stock prices. For insider sales, shareholder protection decreases their negative information content. We conjecture that this is due to the effect of greater transparency and trustworthiness strengthening the diversification and liquidity reasons for selling in better shareholder protection countries. We find limited support for the rent-extraction hypothesis that conjectures that shareholder protection is associated with insider trading dollar profits.     

Insider trading and the long-run performance of new security issues

This paper uses insider trading around new security issues to provide evidence of managerial timing ability. I show that insider sales increase and purchases decrease prior to issues of information-sensitive securities (convertible debt and equity) by industrial firms. I then examine the relation between insider trading and subsequent stock returns. Although not all equity issues are motivated by overvaluation, those where managers sell prior to the issue are more likely to be. I find that industrial firms with abnormal insider selling underperform in the long run, whereas those with abnormal buying do not. There is no evidence of a relation between abnormal selling and future performance for utility offerings, however. Overall, the evidence is consistent with poor long-term performance being due to overvaluation.