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Do co-opted boards increase insider profitability?

Dewan Rahman, Ihtisham Malik, Searat Ali and Jamshed Iqbal

Journal of Contemporary Accounting and Economics, 2021, vol. 17, issue 3

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.

Keywords: Co-opted boards; Insider trading; Market-adjusted buy-and-hold abnormal returns (search for similar items in EconPapers)
JEL-codes: G14 G34 G40 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jocaae:v:17:y:2021:i:3:s1815566921000230

DOI: 10.1016/j.jcae.2021.100265

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Journal of Contemporary Accounting and Economics is currently edited by Agnes C.S. Cheng, P. Clarkson, F.A. Gul, Zoltan Matolcsy, Dan Simunic and Ben Srinidhi

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