Executives’ Legal Records, Lavish Lifestyles and Insider Trading Activities
University of Minnesota
Date: May 9, 2014
Time: 11:00 am - 12:30 pm
Location: Room 410
We examine how and why insider trading varies across senior executives and their firms. We posit that relatively materialistic (or unfrugal) executives, as evidenced by the ownership of luxury goods, and executives with relatively low respect for rules and self-control, as evidenced by a legal record, have a high propensity to exploit inside trading opportunities relative to other executives at their firms. Consistent with this hypothesis, we document that the profitability and strategic timing of trades are higher for unfrugal and recordholder senior executives than for other senior executives of the same firms. The profitability and strategic timing of unfrugal executives’ purchases increase significantly with opportunities to trade on inside information, as measured by proxies for information asymmetry and a weak corporate control environment, and, as expected, these effects are significantly larger for unfrugal (i.e. high propensity) executives than for frugal (i.e. low propensity) executives. The analogous results for recordholders are less pronounced, as might be expected if recordholders have low self-control and/or a low respect for rules and norms, mitigating the deterrent effect of corporate controls. Finally, as predicted, the profitability of non-CEOs’ purchases is higher in firms run by unfrugal (vs. frugal) CEOs. The effect of CEO type on the profitability of trades by other senior executives is corroborated on a sample of firms whose CEO died in office by the incremental profits detected upon the unplanned transition from a frugal to unfrugal CEO relative to the behavior of trading profits upon other unplanned CEO transitions.
For more information, please contact Karen Robertson at: karen.robertson [at] mcgill.ca.