Stress and Trading Behavior: Informativeness of Insider Trading Around COVID-19 Pandemic

Prior literature shows that higher incomes lead to fewer financial worries, which improves one’s mental health. Therefore, higher investment returns can enhance investors’ mental health during a crisis. To test this hypothesis, this paper examines whether insiders involved in opportunistic trading during the COVID-19 pandemic in the U.S. improved their mental health by greater investment returns. We find evidence that opportunistic insiders earned greater investment returns from informed trading when their mental health was poor. Our statistically significant findings suggest that higher mental stress did not prevent opportunistic buyers from informed buying of shares which helped to generate greater returns when those stocks performed better. Our findings also suggest that opportunistic sellers in poor mental health sold shares to generate greater returns before the stock prices went down due to the pandemic. Our results are robust under different considerations such as event studies, robustness tests, placebo-event study and endogeneity concerns. Overall findings highlight the importance for policymakers to take greater initiatives to prevent informed trading by opportunistic insiders suffering from poor mental health during a crisis such as the COVID-19 pandemic.