Board Insider Trading: an Investigation of Individual Director Characteristics, Board Social Connections and Consequences for Board Performance

In the finance literature, a vast body of research shows that that insiders trade on their private information and doing so, earn abnormal returns (Ke et al. 2003; Jagolinzer, 2009; Ravina and Sapienza, 2010, Huddart et al. 2007). However, we know very little about the personal characteristics of directors engaging in insider trading. Although insider trading decisions are individually taken by insiders, prior research has predominantly focused on firm-level characteristics in explaining insider trading gains. In this project, I investigate whether directors’ individual characteristics have an influence on their insider trading performance and how social connections between independent directors and management can benefit insider trading performance for both parties. Furthermore, I also assess the relationship between director insider trading returns and board performance and as such provide valuable insights into the determinants as well as the consequences of board insider trading. The findings in this research project will be of use to investors and regulators, allowing investors to more consciously decide on the type of directors that represent them on the board and to make sure that they act in their best interest. Regulators, on the other hand, will be better able to assess the impact of new corporate governance legislation on insider trading behavior. Furthermore, the results from this research will also allow for improved targeting of enforcement actions.