Insider Trading and Corporate Board Reforms:
International Evidence
Dien Giau (Richard) Bui§, Harvey Nguyen¥, Mia Hang Pham⁑
Abstract
We examine whether changes to corporate governance resulting from board reforms affect insider trading activities. While the connection between corporate governance and informed transactions has sparked the interests of both academics and practitioners, a lack of exogenous variation in governance has hampered inference. This paper employs a country’s implementation of major governance reforms that capture shocks to board reforms for firms in 41 countries. Our difference-in-differences analysis shows a decline in insider trading activities and trading profit following the reforms. We find that decreased information asymmetry helps curb insider trading after board reforms. Rule-based reforms and reforms involving board and audit committee independence curtail insider trading while other types of reforms do not. The effect of board reforms on insider trading is more pronounced among countries with tighter public enforcement, more effective judicial systems, and higher financial reporting quality. Overall, our findings suggest that the governance mechanisms implemented in board reforms effectively discourage insider transactions. Our paper contributes to a growing literature on the implications of corporate governance mechanisms for financial markets and corporate management practices.
JEL classification codes: G14; G15; G38; K42.
Keywords: Insider Trading; Board reforms; Corporate Governance.
Data availability: Data are available from the data sources identified in the paper.
Revised Version: November 2022
*Acknowledgments: We appreciate helpful comments from Ronald Masulis, Sumit Agarwal, Omrane Guedhami, Emmanuel Adegbite, Antje Berndt, Sabri Boubaker, Jennifer Conrad, Scott Cunningham, Arman Eshraghi, Nicolas Eugster, Lixiong Guo, Duc Khuong Nguyen, Cuong Nguyen, Michael Skully, Isaac Tabner, Cameron Truong, and Massey Business School’s Sustainability and CSR Research Group, seminar participants at Massey University, Yuan Ze University, and conference participants at the Society for Financial Studies (SFS) Cavalcade Asia-Pacific (Hong Kong), New Zealand Finance Meeting (Auckland), Asia Conference on Business and Economic Studies (Ho Chi Minh), and Vietnam Symposium in Banking and Finance (Hanoi). We thank 2iQ, especially Patrick Hable, Kevin Adams, and Nikolay Vasilev for providing and helping us understand the global insider trading data. We thank Daniel Taylor for sharing the code to estimate insider trading profit. We thank Susan Moyle for her excellent proofreading service. All remaining errors are our own.
Corresponding author: Harvey Nguyen, School of Economics and Finance, Massey University, Auckland 0745, New Zealand, Telephone: +64 9213 6157, Email: [email protected].
§College of Management, Yuan Ze University, Taiwan, email: [email protected]
¥ School of Economics & Finance, Massey University, New Zealand, email: [email protected]
⁑Massey Business School, Massey University, New Zealand, email: [email protected]
