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Institutional Investors and Insider Trading Profitability

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  • Robert Bricker
  • Garen Markarian

Abstract

This study examines the relationship between institutional ownership and the profitability of insider trading. A priori the relationship is not clear. On the one hand, institutions possess superior information that erodes insider advantages and are also active in monitoring. On the other hand, institutions could treat insider trading as an incentivizing mechanism to induce manager effort, leading to improved aggregate shareholder welfare. The results indicate that, on average, institutional ownership is negatively related to the profitability of insider trading, and this relationship derives from both direct monitoring and trading/pricing. Further analysis indicates that this relationship is concentrated for insider sales. In contrast, the findings reveal a positive relationship between institutions and the profitability of insider purchases, indicating an incentivizing role.

Suggested Citation

  • Robert Bricker & Garen Markarian, 2015. "Institutional Investors and Insider Trading Profitability," European Accounting Review, Taylor & Francis Journals, vol. 24(3), pages 495-518, September.
    • Handle: RePEc:taf:euract:v:24:y:2015:i:3:p:495-518
    DOI: 10.1080/09638180.2015.1040045
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    References listed on IDEAS

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    1. repec:aei:rpbook:53302 is not listed on IDEAS
    2. Jie Hu & Thomas H. Noe, 1997. "Insider trading, costly monitoring, and managerial incentives," FRB Atlanta Working Paper 97-2, Federal Reserve Bank of Atlanta.
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    Cited by:

    1. Li, Tao & Ji, Yu, 2021. "Institutional ownership and insider trading profitability: Evidence from an emerging market," Pacific-Basin Finance Journal, Elsevier, vol. 70(C).
    2. Sadok El Ghoul & Omrane Guedhami & Robert Nash & He (Helen) Wang, 2022. "Economic policy uncertainty and insider trading," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 45(4), pages 817-854, December.
    3. Akram Khalilov & Beatriz Garcia Osma, 2020. "Accounting conservatism and the profitability of corporate insiders," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 47(3-4), pages 333-364, March.
    4. Chen, Shenglan & Ma, Hui & Wu, Qiang & Zhang, Hao, 2023. "Does common ownership constrain managerial rent extraction? Evidence from insider trading profitability," Journal of Corporate Finance, Elsevier, vol. 80(C).
    5. Kazeem Toyin Cynthia & Omole Ilesanmi Isaac, 2021. "Ownership Structure and Performance of Selected Quoted Manufacturing Companies in Nigeria," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 5(12), pages 725-735, December.
    6. Shu Ling Lin & Jun Lu & Jung-Bin Su & Wei-Peng Chen, 2018. "Sustainable Returns: The Effect of Regional Industrial Development Policy on Institutional Investors’ Behavior in China," Sustainability, MDPI, vol. 10(8), pages 1-28, August.
    7. Peng Yifeng, 2024. "Internet sentiment exacerbates intraday overtrading, evidence from A-Share market," Papers 2404.12001, arXiv.org, revised Jul 2024.
    8. Li, Tao & Wang, Yan & Li, Haomin, 2023. "Corporate social responsibility and insider trading profitability: Evidence from an emerging market," Pacific-Basin Finance Journal, Elsevier, vol. 77(C).
    9. Liu, Hui & Chang, Yufan & Zuo, Man, 2023. "Key audit matters and insider trading profitability: Evidence from China," Journal of Contemporary Accounting and Economics, Elsevier, vol. 19(3).
    10. Hoang, Lai T. & Wee, Marvin & Yang, Joey Wenling, 2023. "Strategic trading by insiders in the presence of institutional investors," Journal of Financial Markets, Elsevier, vol. 64(C).

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