Corporate Governance and Opportunistic Insider Trade

• Main Authors: Gunny, Katherine, KE, Bin, Zhang, Tracey Chunqi
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2008
• Subjects: Insider Trade; Managerial Opportunism; Managerial Agency Costs; Corporate Governance; Accounting; Business Law, Public Responsibility, and Ethics; Portfolio and Security Analysis
• Online Access: https://ink.library.smu.edu.sg/soa_research/93
• Institution: Singapore Management University

Prior research provides evidence that insiders generate significant abnormal returns by trading on private information. We use the cross sectional variations of insidersÆ ability to trade opportunistically to gauge managerial opportunism at the company level. Using U.S. top executivesÆ insider trades data; we develop a proxy for managerial opportunism, referred to as opportunistic insider trade (OIT). We first show companies with higher degrees of opportunistic insider trade have (1) worse future earnings performance and (2) lower market valuation contemporaneously (TobinÆs Q). This seems to suggest OIT represents managerial opportunism. We also show OIT is incrementally useful as a proxy for managerial opportunism after considering two popular corporate governance indices (G-Index and Gov-Score). Next we investigate whether various forms of managerial opportunism are substitutes or complements. We find opportunistic insider trade is positively associated with two other forms of managerial opportunism earnings misstatements and illegal stock option backdating. It seems to suggest that different forms managerial opportunism are driven by the same underlying economic forces.