Corporate Governance and the Information Content of Insider Trades

Authors


  • We thank William Beaver, Maureen McNichols, Abbie Smith (editor), two anonymous referees, and seminar participants at Stanford University for comments and suggestions. We also thank the Society of Corporate Secretaries and Governance Professionals, The Rock Center for Corporate Governance, and the Corporate Governance Research Program at Stanford University for providing a portion of the data used in this paper. We thank John Johnson and Ravi Pillai for extensive programming help. Daniel Taylor gratefully acknowledges financial support from the Deloitte Foundation.

ABSTRACT

Most corporate governance research focuses on the behavior of chief executive officers, board members, institutional shareholders, and other similar parties. Little research focuses on the impact of executives whose primary responsibility is to enforce and shape corporate governance inside the firm. This study examines the role of the general counsel (GC) in mitigating informed trading by corporate insiders. We find that insider trading profits and the predictive ability of insider trades for future operating performance are generally higher when insiders trade within firm-imposed restricted trade windows. However, when GC approval is required to execute a trade, insiders’ trading profits and the predictive ability of insider trades for future operating performance are substantively lower. Thus, when given the authority, it appears the GC can effectively limit the extent to which corporate insiders use their private information to extract rents from shareholders.

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