Do co-opted boards increase insider profitability? |
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Authors: | Dewan Rahman Ihtisham Malik Searat Ali Jamshed Iqbal |
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Institution: | 1. University of Queensland, Colin Clark Building, St. Lucia, QLD 4072, Australia;2. University of Wollongong, School of Business, Faculty of Business and Law, NSW 2522, Australia;3. University of Vaasa, School of Accounting and Finance, P.O. Box 700, FI-65101 Vaasa, Finland |
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Abstract: | 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. |
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Keywords: | Co-opted boards Insider trading Market-adjusted buy-and-hold abnormal returns G14 G34 G40 |
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