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Do they do it for the money?

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  • Bhattacharya, Utpal
  • Marshall, Cassandra D.

Abstract

Using a sample of all top management who were indicted for illegal insider trading in the United States for trades during the period 1989–2002, we explore the economic rationality of this white-collar crime. If this crime is an economically rational activity in the sense of Becker (1968), where a crime is committed if its expected benefits exceed its expected costs, “poorer” top management should be doing the most illegal insider trading. This is because the “poor” have less to lose (present value of foregone future compensation if caught is lower for them). We find in the data, however, that indictments are concentrated in the “richer” strata after we control for firm size, industry, firm growth opportunities, executive age, the opportunity to commit illegal insider trading, and the possibility that regulators target the “richer” strata. We thus rule out the economic motive for this white-collar crime, and leave open the possibility of other motives.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Corporate Finance.

Volume (Year): 18 (2012)
Issue (Month): 1 ()
Pages: 92-104

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Handle: RePEc:eee:corfin:v:18:y:2012:i:1:p:92-104

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Web page: http://www.elsevier.com/locate/jcorpfin

Related research

Keywords: White-collar crime; Insider trading; SEC enforcement; CEO compensation;

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References

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  1. Murphy, Kevin J., 2003. "Stock-based pay in new economy firms," Journal of Accounting and Economics, Elsevier, vol. 34(1-3), pages 129-147, January.
  2. Gary S. Becker, 1974. "Crime and Punishment: An Economic Approach," NBER Chapters, in: Essays in the Economics of Crime and Punishment, pages 1-54 National Bureau of Economic Research, Inc.
  3. Mitchell A. Petersen, 2005. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," NBER Working Papers 11280, National Bureau of Economic Research, Inc.
  4. Feinstein, Jonathan S, 1990. "Detection Controlled Estimation," Journal of Law and Economics, University of Chicago Press, vol. 33(1), pages 233-76, April.
  5. Karpoff, Jonathan M. & Scott Lee, D. & Martin, Gerald S., 2008. "The consequences to managers for financial misrepresentation," Journal of Financial Economics, Elsevier, vol. 88(2), pages 193-215, May.
  6. Agrawal, Anup & Jaffe, Jeffrey F & Karpoff, Jonathan M, 1999. "Management Turnover and Governance Changes following the Revelation of Fraud," Journal of Law and Economics, University of Chicago Press, vol. 42(1), pages 309-42, April.
  7. Meulbroek, Lisa K, 1992. " An Empirical Analysis of Illegal Insider Trading," Journal of Finance, American Finance Association, vol. 47(5), pages 1661-99, December.
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Cited by:
  1. Agrawal, Anup & Nasser, Tareque, 2012. "Insider trading in takeover targets," Journal of Corporate Finance, Elsevier, vol. 18(3), pages 598-625.

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