IDEAS home Printed from https://ideas.repec.org/a/eee/empfin/v72y2023icp341-353.html
   My bibliography  Save this article

Policy risk and insider trading

Author

Listed:
  • Akbulut, Mehmet E.
  • Ucar, Erdem

Abstract

Prior research has examined the influence of political geography on finance through an analysis of local policy risk and has shown that investors recognize and factor it into their pricing decisions. We contribute to this literature by examining whether managers recognize and respond to local policy risk. We use managerial insider trading as a test environment and show that managers respond to this risk by actively trying to reduce their exposure to it. We find that managers abnormally increase their insider sales when local policy risk is high. The effect of local policy risk on insider trading increases after the presidential elections if the firm’s state becomes more politically aligned with the President as a result. The effect is weaker for firms with PAC contributions or firms located closer to state capitals with potentially stronger political connections.

Suggested Citation

  • Akbulut, Mehmet E. & Ucar, Erdem, 2023. "Policy risk and insider trading," Journal of Empirical Finance, Elsevier, vol. 72(C), pages 341-353.
    • Handle: RePEc:eee:empfin:v:72:y:2023:i:c:p:341-353
    DOI: 10.1016/j.jempfin.2023.04.002
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0927539823000361
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jempfin.2023.04.002?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Pantzalis, Christos & Park, Jung Chul, 2014. "Too close for comfort? Geographic propinquity to political power and stock returns," Journal of Banking & Finance, Elsevier, vol. 48(C), pages 57-78.
    2. Bradley, Daniel & Pantzalis, Christos & Yuan, Xiaojing, 2016. "Policy risk, corporate political strategies, and the cost of debt," Journal of Corporate Finance, Elsevier, vol. 40(C), pages 254-275.
    3. Fama, Eugene F. & French, Kenneth R., 1997. "Industry costs of equity," Journal of Financial Economics, Elsevier, vol. 43(2), pages 153-193, February.
    4. Hilary, Gilles & Hui, Kai Wai, 2009. "Does religion matter in corporate decision making in America?," Journal of Financial Economics, Elsevier, vol. 93(3), pages 455-473, September.
    5. Mara Faccio & Maria-Teresa Marchica & Roberto Mura, 2011. "Large Shareholder Diversification and Corporate Risk-Taking," The Review of Financial Studies, Society for Financial Studies, vol. 24(11), pages 3601-3641.
    6. Matthew T. Billett & Yiming Qian, 2008. "Are Overconfident CEOs Born or Made? Evidence of Self-Attribution Bias from Frequent Acquirers," Management Science, INFORMS, vol. 54(6), pages 1037-1051, June.
    7. Scott R. Baker & Nicholas Bloom & Steven J. Davis, 2016. "Measuring Economic Policy Uncertainty," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 131(4), pages 1593-1636.
    8. Kumar, Alok & Page, Jeremy K. & Spalt, Oliver G., 2011. "Religious beliefs, gambling attitudes, and financial market outcomes," Journal of Financial Economics, Elsevier, vol. 102(3), pages 671-708.
    9. Kim, Chansog (Francis) & Pantzalis, Christos & Chul Park, Jung, 2012. "Political geography and stock returns: The value and risk implications of proximity to political power," Journal of Financial Economics, Elsevier, vol. 106(1), pages 196-228.
    10. Akbulut, Mehmet E., 2013. "Do Overvaluation-Driven Stock Acquisitions Really Benefit Acquirer Shareholders?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 48(4), pages 1025-1055, August.
    11. Aabo, Tom & Lee, Suin & Pantzalis, Christos & Park, Jung Chul, 2020. "Know thy neighbor: Political uncertainty and the informational advantage of local institutional investors," Journal of Banking & Finance, Elsevier, vol. 113(C).
    12. Lee, Suin & Pantzalis, Christos & Park, Jung Chul, 2019. "Does local culture trigger speculative investment behavior?," Journal of Business Research, Elsevier, vol. 103(C), pages 71-88.
    13. Christo Pirinsky & Qinghai Wang, 2006. "Does Corporate Headquarters Location Matter for Stock Returns?," Journal of Finance, American Finance Association, vol. 61(4), pages 1991-2015, August.
    14. Agrawal, Anup & Nasser, Tareque, 2012. "Insider trading in takeover targets," Journal of Corporate Finance, Elsevier, vol. 18(3), pages 598-625.
    15. Ucar, Erdem, 2018. "Local creative culture and corporate innovation," Journal of Business Research, Elsevier, vol. 91(C), pages 60-70.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Fan, Cunbin & Zou, Guohao & Wang, Jiawen, 2024. "M&A performance commitments and insider trading: ‘Listen to their words’ or ‘watch their actions’?," International Review of Financial Analysis, Elsevier, vol. 91(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Christos Pantzalis & Jung Chul Park, 2020. "Stock Market Consequences Of Political Vibrancy," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 43(3), pages 491-542, August.
    2. Panta, Humnath, 2020. "Does social capital influence corporate risk-taking?," Journal of Behavioral and Experimental Finance, Elsevier, vol. 26(C).
    3. Lei Zhang & Kiridaran Kanagaretnam & Jing Gao, 2024. "Climate Change Social Norms and Corporate Cash Holdings," Journal of Business Ethics, Springer, vol. 190(3), pages 661-683, March.
    4. Pantzalis, Christos & Ucar, Erdem, 2014. "Religious holidays, investor distraction, and earnings announcement effects," Journal of Banking & Finance, Elsevier, vol. 47(C), pages 102-117.
    5. Li Fan & Jie He, 2023. "The Impact of Gambling Culture on Entity Financialization," Sustainability, MDPI, vol. 15(5), pages 1-19, February.
    6. Almaghrabi, Khadija S. & Tsalavoutas, Ioannis, 2022. "Political spending, related voluntary disclosure, and the cost of public debt," Journal of Financial Stability, Elsevier, vol. 63(C).
    7. Colak, Gonul & Gounopoulos, Dimitrios & Loukopoulos, Panagiotis & Loukopoulos, Georgios, 2021. "Political power, local policy uncertainty and IPO pricing," Journal of Corporate Finance, Elsevier, vol. 67(C).
    8. Chen, Yunsen & Huang, Jianqiao & Xiao, Sheng & Zhao, Ziye, 2020. "The “home bias” of corporate subsidiary locations," Journal of Corporate Finance, Elsevier, vol. 62(C).
    9. Adhikari, Binay Kumar & Agrawal, Anup, 2016. "Does local religiosity matter for bank risk-taking?," Journal of Corporate Finance, Elsevier, vol. 38(C), pages 272-293.
    10. Biswas, Sonny & Zhai, Wei, 2021. "Economic policy uncertainty and cross-border lending," Journal of Corporate Finance, Elsevier, vol. 67(C).
    11. Kelvin K. F. Law & Lillian F. Mills, 2017. "Military experience and corporate tax avoidance," Review of Accounting Studies, Springer, vol. 22(1), pages 141-184, March.
    12. Ooi, Chai-Aun & Hooy, Chee-Wooi, 2022. "Muslim CEOs, risk-taking and firm performance," Pacific-Basin Finance Journal, Elsevier, vol. 74(C).
    13. Erdem Ucar, 2019. "Creative culture, risk‐taking, and corporate financial decisions," European Financial Management, European Financial Management Association, vol. 25(3), pages 684-717, June.
    14. Stergios Leventis & Emmanouil Dedoulis & Omneya Abdelsalam, 2018. "The Impact of Religiosity on Audit Pricing," Journal of Business Ethics, Springer, vol. 148(1), pages 53-78, March.
    15. Jay Cai & Guifeng Shi, 2019. "Do Religious Norms Influence Corporate Debt Financing?," Journal of Business Ethics, Springer, vol. 157(1), pages 159-182, June.
    16. Wei-Fong Pan, 2019. "Geopolitical Risk and R&D investment," Economics Discussion Papers em-dp2019-11, Department of Economics, University of Reading.
    17. Sadok El Ghoul & Omrane Guedhami & Yang Ni & Jeffrey Pittman & Samir Saadi, 2012. "Does Religion Matter to Equity Pricing?," Journal of Business Ethics, Springer, vol. 111(4), pages 491-518, December.
    18. Goodell, John W. & Kumar, Satish & Lahmar, Oumaima & Pandey, Nitesh, 2023. "A bibliometric analysis of cultural finance," International Review of Financial Analysis, Elsevier, vol. 85(C).
    19. Jinhua Cui & Hoje Jo & Haejung Na & Manuel Velasquez, 2015. "Workforce Diversity and Religiosity," Journal of Business Ethics, Springer, vol. 128(4), pages 743-767, June.
    20. Kryzanowski, Lawrence & Nie, Yulin (George), 2019. "M&A price pressure revisited," Finance Research Letters, Elsevier, vol. 28(C), pages 299-308.

    More about this item

    Keywords

    Insider trading; Local policy risk; Political geography; Political uncertainty;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • H1 - Public Economics - - Structure and Scope of Government

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:empfin:v:72:y:2023:i:c:p:341-353. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jempfin .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.