Do Board Characteristics Matter to Insider Timing and Profitability in the US Market?

Abstract

In this paper I analyze the relationship between insider trading and corporate governance characteristics.Despite, the widely held view that insider trading significantly affects stock prices; little is known about what causes such market inefficiency and whether firm characteristics matters. This paper focuses on the impact of board structure towards insider trading and stock price efficiency. Using an event study methodology, this paper analyzes the influence of different board characteristics on insider profits as measured by share price abnormal returns. It also uses purchase ratio as a proxy for insider trading activities. Findings suggest that higher board independence, small board size and high debt levels have a significant influence towards reducing insider profits. The trading activities of insiders appear to have no significant relationship to the corporate governance characteristics of the firm. The overall results suggest that good governance reduces insider abnormal profits and increase stock price efficiency. With regards to insider trading activities we found little evidence suggesting corporate governance impact insider trading associated with future cash-flows. The study uses a sample of 250 firms from S&P 500 Index from 2000 to 2005.