Executives’ Legal Records and Insider Trading Activities

Robert H Davidson
McCombs School of Business, The University of Texas at Austin

Aiyesha Dey
United States Securities and Exchange Commission
Carlson School of Management, University of Minnesota

Abbie J Smith
The University of Chicago Booth School of Business

December 2016


We examine how and why insider trading varies across senior executives and their firms. As predicted, the profitability of both purchases and sales are higher for “recordholder” executives (those who have a record of legal infractions), than for other “non-recordholder” executives at the same firms. The profitability of recordholder executives’ purchases and sales decrease significantly with proxies for strong information and governance environments, suggesting that recordholders have a relatively higher propensity to exploit inside information given the opportunity. Finally, our classification of executives (recordholder status) can predict future firm returns and firm-specific news and information events.

JEL Classification Codes: G30; G34; G38

We acknowledge helpful comments from John Core, Rodrigo Verdi, Christine Zulehner, the workshop participants at University of Colorado, Duke University, Georgetown University, Indiana University, McGill University, MIT, and conference participants at the 2014 HBS Information, Markets, and Organizations Conference, 2013 Kellogg Accounting Research Conference, 2013 Virginia Accounting Research Conference, and the 2013 SAFE Conference on Transparency at Goethe University Frankfurt. We are grateful to Ryan Ball for providing a sample of bankrupt firms. We also appreciate the financial support of the Accounting Research Center, the Fama Miller Center, the IGM at the University of Chicago Booth School of Business, the Center for Financial Markets and Policy at Georgetown University and the Dean’s Small Grant Program at the University of Minnesota.

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