Does common ownership constrain managerial rent extraction? Evidence from insider trading profitability

Shenglan Chen, Hui Ma, Qiang Wu, Hao Zhang

Research output: Journal article publicationJournal articleAcademic researchpeer-review

8 Citations (Scopus)

Abstract

This study identifies a new economic benefit of common institutional ownership, which refers to the increasingly contentious phenomenon of U.S. firms sharing stockholders with their industry competitors. We find a significantly negative relation between common ownership and insider trading profitability. The disciplinary effect of common ownership on opportunistic insider trading is particularly evident when the information effects of common ownership are greater, when common owners are more likely to benefit from positive governance externalities, and in the subset of trades made by opportunistic insiders. Using the exogenous variations in common ownership induced by financial institution mergers, we conduct a difference-in-differences analysis and find consistent results. We also provide evidence that common owners encourage firms to impose ex-ante restrictions on insider trading and take ex-post actions to discipline opportunistic insiders by voting against management. Overall, our findings suggest that common institutional shareholders have information advantages, governance incentives, and effective means to constrain opportunistic insider trading.

Original languageEnglish
Article number102389
JournalJournal of Corporate Finance
Volume80
DOIs
Publication statusPublished - Jun 2023

Keywords

  • Common ownership
  • Insider trading
  • Institutional investors
  • Managerial opportunism

ASJC Scopus subject areas

  • Business and International Management
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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