Corporate governance and the profitability of insider trading |
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| Institution: | 1. College of Business and Economics, Australian National University, Australia;2. College of Economics and Management, Shanghai Jiao Tong University, PR China;3. Nanyang Business School, Nanyang Technological University, Singapore;4. KAIST College of Business, KAIST, Seoul, Republic of Korea;1. University of Sydney, Australia;2. University of Memphis, United States;1. University of Hamburg, Faculty of Business, Moorweidenstrasse 18, 20148 Hamburg, Germany;2. University of Vienna, Faculty of Business, Economics, and Statistics, Oskar-Morgenstern-Platz 1, 1090 Vienna, Austria;1. Department of Accounting and Corporate Governance, Carl von Ossietzky University Oldenburg, Ammerländer Heerstr. 114-118, 26129 Oldenburg, Germany;2. Department of Finance, College of Business, Florida State University, 251 Rovetta Business Building, Tallahassee, FL 32306, USA |
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| Abstract: | This paper examines the influence of corporate governance systems on insiders' ability to profit from their information advantage and the ways through which corporate governance systems influence such ability. We find that corporate governance significantly reduces the profitability of insider sales but not that of insider purchases. Given that sales involve greater legal risk than purchases, the results suggest that well-governed firms restrict informed insider trading mainly to reduce legal risk. We also find that better-governed firms reduce the profitability of insider sales by increasing the likelihood of adopting ex-ante preventive measures (e.g., voluntary insider trading restriction policies), implementing such measures more effectively, and taking ex-post disciplinary actions more actively. These results highlight how better-governed firms are able to restrict insiders from exploiting private information. |
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