Management friendship and insider opportunism |
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| Affiliation: | 1. School of Statistics and Mathematics, Shandong University of Finance and Economics, Jinan, China;2. School of Urban and Regional Science, Shanghai University of Finance and Economics, Shanghai, China;3. Department of Applied Finance, Macquarie University, Sydney, Australia;4. School of Geography, Earth and Environmental Sciences, University of Birmingham, Birmingham, UK;1. Business School, Sichuan University, Chengdu, China;2. School of Economics and Management, Southwest Jiaotong University, Chengdu, China;1. School of Economics and Management, North China Electric Power University, Beijing, China;2. School of Economics, Beijing Technology and Business University, Beijing, China;1. Smurfit Graduate Business School, University College Dublin Blackrock, Ireland;2. Platform on Sustainable Finance, DG FISMA, European Commission, Belgium;3. University of Essex, Colchester, UK;1. School of Accounting, Lanzhou University of Finance and Economics, PR China;2. Guanghua School of Management, Peking University, PR China |
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| Abstract: | This study documents a significant increase in both trading activity and profitability of opportunistic top managers when a CEO develops a strong connection with subordinate executives through co-opting the executives who share social ties with him/her. This baseline evidence is robust to endogeneity concerns, alternative measures of management connection and insider opportunism, as well as controlling for other CEO and board attributes. Further analyses reveal that interpersonal connections between top managers are more likely to increase opportunistic insider trading in firms with lower-quality voluntary disclosures, more sociable executives, and relaxing legal barriers to insider trades. Increased insider opportunism in response to the CEO’s connection with other top executives engenders less informative stock prices and depresses stock market liquidity. Finally, insider trades in firms with stronger management connection are more predictive of future stock returns. |
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| Keywords: | Insider trading Management connection Corporate governance |
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