How economic uncertainty explains insider trading in an endogenous framework
Abstract/Description
Inside shareholders of firms have information advantage over outsiders, and this is reflected by the optimism proxied by their trading activities in firm shares. This study investigates how economic policy uncertainty (EPU) influences insider trading using a sample of 6,834 US firms for the period 2000 to 2018. We find evidence that insider trading rises with increases in EPU, suggesting that during periods of higher economic uncertainty, insiders not only exploit their information advantage but also send positive signals to the market about firm future performance. A higher proportion of blockholding and long-term investor ownership moderates the impact of EPU on insider trading, suggesting that blockholders and institutional investors closely monitor the firm management and minimize the degree of information asymmetry and advantageous trading opportunities during such periods. We also find that efficient governance mechanisms, represented by the presence of a golden parachute clause in severance contracts, serve to improve monitoring of insiders and reduce the scale of insider trading. The results are robust after employing different proxies for insider trading and economic uncertainty and controlling for potential endogeneity bias.
Keywords
Track
Accounting, Law, and Finance
Session Number/Theme
Session 3B: Accounting, Finance & Law
Session Chair
Dr. Sana Tauseef, Institute of Business Administration, Karachi
Session Discussant
Sohaib Ahmed; Zaira Anees; Dr. Fawad Ahmad; Dr. Tasawar Nawaz
Start Date/Time
24-6-2022 3:20 PM
End Date/Time
24-6-2022 3:40 PM
Location
Training Room 3, Marriott Hotel, Karachi
Recommended Citation
Khawaja, M. Z. (2022). How economic uncertainty explains insider trading in an endogenous framework. 3rd IBA SBS International Conference 2024. Retrieved from https://ir.iba.edu.pk/sbsic/2022/program/43
COinS
How economic uncertainty explains insider trading in an endogenous framework
Training Room 3, Marriott Hotel, Karachi
Inside shareholders of firms have information advantage over outsiders, and this is reflected by the optimism proxied by their trading activities in firm shares. This study investigates how economic policy uncertainty (EPU) influences insider trading using a sample of 6,834 US firms for the period 2000 to 2018. We find evidence that insider trading rises with increases in EPU, suggesting that during periods of higher economic uncertainty, insiders not only exploit their information advantage but also send positive signals to the market about firm future performance. A higher proportion of blockholding and long-term investor ownership moderates the impact of EPU on insider trading, suggesting that blockholders and institutional investors closely monitor the firm management and minimize the degree of information asymmetry and advantageous trading opportunities during such periods. We also find that efficient governance mechanisms, represented by the presence of a golden parachute clause in severance contracts, serve to improve monitoring of insiders and reduce the scale of insider trading. The results are robust after employing different proxies for insider trading and economic uncertainty and controlling for potential endogeneity bias.
