Ethical norms of CFO insider trading
Insider trading encompasses the buying or selling of stocks based on non-public information about the securities in question. Engaging in insider trading is particularly unethical for a Chief Financial Officer (CFO) who holds a fiduciary responsibility to shareholders and also typically is ethically obligated by his or her professional responsibilities. Although the Securities and Exchange Commission (1934) has expressly forbidden insider trading, the business press suggests insider trading continues. An application of Cooter's [Cooter, R., 1997. Normative failure theory of law. Cornell Law Review 82 (5), 947-979; Cooter, R., 2000. Three effects of social norms on law: Expression, deterrence and internalization. Oregon Law Review 79 (1), 1-22] theory of the law and norms suggests that one explanation for the continuation of insider trading is that although illegal, norms may fail to consider insider trader to be unethical. Nevertheless, our knowledge of the norms regarding insider trading is limited. To address this gap, we examine the ethical norms regarding CFOs' insider trading, and consider the extent to which contextual variables are associated with ethical perceptions of CFO insider trading. We find that insider trading by CFOs is generally perceived to be unethical but not by all participants, nor all ethical measures. Moral equity is particularly informative for understanding the ethicality of CFO insider trading. When relying on the multidimensional ethics scale (MES) measure of moral equity, our results reveal that contextual factors, including trading method used (stock options or share equity) and the direction of earnings surprise (favorable or unfavorable) are significant. We also found that participants that possessed more work experience or financial expertise had a greater tendency to consider CFO insider trading to be unethical than those with less work experience or financial expertise, which suggests the importance of training and education of the general public. In addition, our findings suggest that tougher sanctions will encourage compliance with existing insider trading laws. Implications of our findings for public policy are discussed.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
When requesting a correction, please mention this item's handle: RePEc:eee:jappol:v:28:y:2009:i:5:p:386-400. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.