Monitoring from afar: Do foreign institutional investors deter insider trading?

• Main Authors: HONG, Claire Yurong, LI, Frank Weikai, ZHU, Qifei
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2018
• Subjects: Foreign Institutional Ownership; Insider Trading; Monitoring; Finance and Financial Management; Portfolio and Security Analysis
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/5938; https://ink.library.smu.edu.sg/context/lkcsb_research/article/6937/viewcontent/SSRN_id3239075.pdf
• Institution: Singapore Management University

This paper examines the disciplinary effect of foreign institutional investors on opportunistic insider trading. Using a novel global insider trading data set containing 35,557 firms from 26 countries over the period 2000-2015, we find that greater foreign institutional ownership significantly reduces the profitability of insider trading, above and beyond the effect of domestic institutional ownership. Using the exogenous variation in foreign institutional ownership induced by MSCI index inclusion, we show that the effect is causal. The impact of foreign investors is stronger in countries with weak insider trading regulations and poor institutional environments, and operates mainly through the monitoring channel, rather than the channel of improved information environments.