Does corporate governance matter to insider trading?

• Main Author: Kiwia, Bill
• Published: University of Leeds 2011
• Subjects: 364.16
• Online Access: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.713511

The majority of US based insider-trading research argues that trading using private information is harmful and produces adverse selection costs for outside market participants (Seyhun, 2000). Despite this, evidence shows that insider-trading regulations are ineffective in curtailing the actions of corporate insiders in the US capital market (Seyhun, 1986, Lakonishok and Lee, 2001, 'Garfinkel, 1997). It appears that these regulations had an impact only on the stock-trading patterns of insiders particularly those around corporate news and failed to eliminate opportunistic insider-trading activity (Garfinkel, 1997). Despite these findings, the impact of corporate governance on insider-trading activity and performance has been little researched. This thesis examines empirically the role played by the characteristics of the board, debt level and managerial remuneration with regard to insider profit and trading activity in the US. The agency model proposes that corporate governance may be used as a tool to align managerial interests with shareholders' interests (Jensen and Meckling, 1976). Corporate governance measures such as independent directors, debt-financing and executive remuneration (particularly executive director shareholdings) are proposed by the agency model to be effective tools for 'reducing asymmetric information between managers and shareholders. I used a sample of 350 US firms to examine whether these measures help to reduce the performance of insider trades and their trading activity. The three empirical chapters of this thesis show that board structure does affect the performance of insiders in their stock transactions but do not reduce opportunistic insider-trading activity. I also found that firms with weaker credit ratings and lower executive remunerations have a positive relationship to insider-trading activity associated with private information (i.e. opportunistic insider-trading). My results suggest that corporate governance mitigates agency problems and, as such, may reduce opportunities for corporate insiders to trade opportunistically in the capital market. This may add value to the security exchange market regulators' emphasis on better internal and external corporate governance mechanisms so that they may reduce the opportunities available for corporate insiders in the capital market.