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Corporate labor investment decisions and insider trading

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  • Hsueh‐Tien Lu
  • Guang‐Zheng Chen

Abstract

Managers possess superior information on labor investments compared to outside investors, which may induce severe agency problems of moral hazard. This study explores whether labor investment decisions embed private information that affects corporate insiders' informed trading profits. Our sample comprises Chinese A‐share firms listed on the Shanghai and Shenzhen stock exchanges from 2007 to 2020. As in prior studies, the analysis utilizes a multivariate regression model and includes robustness checks using an instrumental variable approach and a propensity score matching procedure. The results indicate that labor investment inefficiency is positively associated with insider trading profitability. This suggests that lower labor investment efficiency leads to increased information asymmetries, enabling insiders to exploit their private information to extract rents from shareholders. We also find that the higher trading profits are primarily attributable to insiders' sell trades and male insiders' trades. Our findings advance the literature by illustrating that inefficiencies around labor can facilitate opportunistic behavior by corporate insiders. This study also provides practical implications that inefficient labor investment decisions can serve as an indicator of insider trading.

Suggested Citation

  • Hsueh‐Tien Lu & Guang‐Zheng Chen, 2026. "Corporate labor investment decisions and insider trading," Review of Financial Economics, John Wiley & Sons, vol. 44(1), January.
    • Handle: RePEc:wly:revfec:v:44:y:2026:i:1:n:e70026
    DOI: 10.1002/rfe.70026
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