Institutional ownership and insider trading profitability: Evidence from an emerging market

Tao Li and Yu Ji

Pacific-Basin Finance Journal, 2021, vol. 70, issue C

Abstract: As institutional investors play a significant role in improving corporate governance and stabilizing the stock market in China, we test whether and how institutional ownership affects insider trading profitability in China. Our empirical findings show that institutional ownership reduces the profitability of total insider trading and insider sales but increases the profitability of insider purchases, which is consistent with the difference between Chinese regulators' attitudes toward insider sales and their attitude toward purchases. Our findings are robust to the inclusion of firm fixed effects, alternative proxies and the consideration of self-selection bias and endogeneity problems. The mediation analyses indicate that institutional investors reduce the agency costs associated with insider trading mainly through their direct rather than indirect monitoring activities. Moreover, we find that the effect of institutional ownership on insider trading is most prevalent in firms that are non-state-owned enterprises and that have high insider ownership, which validates the governance role of institutional investors. Furthermore, we find that insider trading profitability is significantly affected by firms' ownership by pressure-resistant institutional investors, but not by firms' ownership by pressure-sensitive institutional investors.

Keywords: Institutional ownership; Insider trading profitability; Insider sales profitability; Insider purchase profitability; Emerging markets (search for similar items in EconPapers)
JEL-codes: G23 G34 M41 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0927538X2100175X
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:70:y:2021:i:c:s0927538x2100175x

DOI: 10.1016/j.pacfin.2021.101668

Access Statistics for this article

Pacific-Basin Finance Journal is currently edited by K. Chan and S. Ghon Rhee

More articles in Pacific-Basin Finance Journal from Elsevier
Bibliographic data for series maintained by Catherine Liu ().