Corporate governance and the profitability of insider trading

Lili Dai, Renhui Fu, Jun-Koo Kang and Inmoo Lee

Journal of Corporate Finance, 2016, vol. 40, issue C, 235-253

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.

Keywords: Corporate governance; Insider purchases; Insider sales; Profitability of insider trading; Legal risk (search for similar items in EconPapers)
JEL-codes: G34 K22 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (49)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:40:y:2016:i:c:p:235-253

DOI: 10.1016/j.jcorpfin.2016.08.002

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