Executives’ Legal Records and Insider Trading Activities

Robert H Davidson
Pamplin School of Business, Virginia Polytechnic Institute and State University

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

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