The effect of board reforms on insider trading remains unclear due to the mixed implications from the literature. We further examine cross-sectional variations in the relationship between board reforms and insider trading. We find that the effects of the board reform on insider trading are more pronounced for mandatory reforms than for voluntary reforms.
Third, we consider the moderating role of country-level characteristics on the relationship between governance reforms and insider trading. Therefore, we expect that the effects of governance reforms on insider trading may vary across countries with different legal origins. Fourth, we examine whether litigation risk influences the effects of governance reforms on insider trading.
If this hypothesis holds, the implementation of board reforms is expected to have a positive relationship with insider trading. H2: The effects of board reform on insider trading are more pronounced in firms with high information asymmetry.
Sample and variables 1. Data and sample
In addition, a range of literature documents that country-level characteristics such as regulations and the legal system have a significant impact on market efficiency and thus potentially influence insider trading (e.g. Bebchuk and Fershtman (1994), La Porta et al. Therefore we expect that the relationship between board reforms and insider trading is not uniform across different types of reforms and country-level institutions.In our analysis, we investigate the effect of reforms on insider trading separately for the first and main reform years.
8 Other studies using 2iQ Global Insider Trading data include Dardas and Guttler (2011), who examine the informativeness of directors' transaction reports; Jin, Livnat, and Zhang (2013) who examine how insider trading affects market reactions to analyst forecast revisions; Chowdhury, Mollah, and Al Farooque (2018) who examine insiders' manipulation practices; and Bourveau, Brochet, Ferri, and Sun (2021) who examine the impact of say-on-pay on insider trading. 9 2IQ collects insider trading data from financial and regulatory authorities and includes only legal insider trading data. The data on legal insider transactions are important for our research setting because the link between corporate governance reform and legal insider trading remains unclear.
Our dependent variable is insider trading, and we obtain insider trading data from the 2iQ Global Insider Trading database. These summary statistics are consistent with previous international studies on insider trading (e.g. Bris (2005), Fidrmuc, Korczak and Korczak (2013), Denis and Xu (2013)).
Empirical findings
We consider the effect of reforms on domestic trade for two types of reforms: main reforms (columns (1) to (5)); and the first reform (columns (6) to (10)). The negative association between board reforms and insider trading persists for both main and first reforms. We report the results for these tests in Appendix A3 and consistently find that board reforms have significant effects on insider transactions.
Consistent with the previous results, the results of the matched sample indicate a decrease in insider trading activities and trading profit after the board reform. We find that the estimated coefficients of Year (-1)i,t are insignificant, indicating no difference in insider trading between treatment and control firms before the first board reforms. More importantly, we find that the treatment effect of the first board reforms appears since then.
We thus see the negative effect of board reforms on insider trading more clearly from the first year onwards after the board reforms. To test this possibility, we examine the effect of board reforms on insider trading, conditional on the firm's information environment before the reform. First, we examine how the reform implementation enables the effects of board reforms on insider trading.
Because the three main components serve different purposes, the effect of governance reforms on insider trading may vary by type of reform.18. We then examine the moderating effects of countries' institutional characteristics on the effects of governance reforms and insider trading. Therefore, we expect that the effects of governance reforms and insider trading may vary across countries with different regulatory regimes.
We further consider how a country's information environment moderates the effects of board reforms on insider transactions. We consider the effect of reforms on the benefit of domestic trade for two types of reforms: main reforms (columns (1) to (4)); and the first reforms (columns (5) to (10)). Thus, our results show that improved insider monitoring practices after board reforms contribute to lower insider trading profitability.
Table 12's results suggest that our documented effects of board reforms on insider trading are robust to alternative window estimation. In addition, we consider whether the degree of litigation risk affects the effects of board reforms on insider trading.23 We report the results of these tests in Appendix A5.
Conclusions
This table shows the results of the differentiation-in-differences regressions of insider trading due to on-boarding reforms. This table shows the results of difference-in-differences regressions of insider trading on board reforms using different model specifications. This table shows the results of regressions of insider trading due to onboarding reforms using three approaches.
Year fixed effects Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes. This table shows the results of the difference-in-differences regressions of insider trading on board reforms that depend on country-level institutions. Panel B shows the results of the differentiation-in-differences regressions of insider trading on board reforms that depend on the country's information environment.
This table shows the results of the difference-in-differences regressions of insider trading and insider trading profit reforms. This table shows the results of difference-in-differences regressions of country-level insider trading due to on-board reforms. This table shows the results of the difference-in-differences regressions of insider trading on board reforms, conditional on the level of litigation risk.
