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Corporate governance and the profitability of insider trading

Author

Listed:
  • Dai, Lili
  • Fu, Renhui
  • Kang, Jun-Koo
  • Lee, Inmoo

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.

Suggested Citation

  • Dai, Lili & Fu, Renhui & Kang, Jun-Koo & Lee, Inmoo, 2016. "Corporate governance and the profitability of insider trading," Journal of Corporate Finance, Elsevier, vol. 40(C), pages 235-253.
    • Handle: RePEc:eee:corfin:v:40:y:2016:i:c:p:235-253
    DOI: 10.1016/j.jcorpfin.2016.08.002
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    More about this item

    Keywords

    Corporate governance; Insider purchases; Insider sales; Profitability of insider trading; Legal risk;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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