TY - JOUR
T1 - Quasi-Indexer Ownership and Insider Trading: Evidence from Russell Index Reconstitutions
AU - Hillegeist, Stephen A.
AU - Weng, Liwei
N1 - Accepted by Hai Lu. We acknowledge helpful comments from Hai Lu (editor), Alan Webb (editor-in-chief), two anonymous reviewers, Jennifer Brown, Lyungmae Choi, Lucile Faurel, Steve Kaplan, Michal Matejka, Terry Walter, seminar participants at Arizona State University, the University of Auckland, the University of Tasmania, and the University of Western Australia, and conference participants at the University of Technology Sydney 2017 Summer Accounting Conference and the 2017 University of Arizona–Arizona State University Joint Research Conference. We would like to thank Russell Investments for providing the Russell index data. We are grateful to Jason Chao of Russell Investments for insightful discussions on the Russell index methodology. The authors appreciate financial support from Arizona State University and the Hong Kong Polytechnic University.
PY - 2021/9/1
Y1 - 2021/9/1
N2 - Understanding the association between quasi-indexer ownership and insider trading is important given the externalities that insider trading can impose on shareholders, the importance of quasi-indexers in the capital markets, and their mixed monitoring incentives. The prior literature has produced an inconsistent set of results regarding this association. These results are difficult to interpret because the association between them is likely endogenous, and prior studies have not employed effective identification strategies to address this issue. In this study, we examine the effects of quasi-indexer institutional ownership on insider trading using the plausibly exogenous discontinuity in quasi-indexer ownership around the Russell 1000/2000 index cutoff. Using both regression discontinuity and instrumental variable research designs, we find higher quasi-indexer ownership leads to less insider trading (both buys and sells) and less profitable sell trades. The effects for sells are concentrated among insider trades that, ex ante, are more likely to be based on private information. Our evidence on the profitability of buys is mixed. In addition, we find firms with higher quasi-indexer ownership are more likely to have and/or more strictly enforce blackout policies. Overall, our results suggest that quasi-indexers can reduce the agency costs associated with insider trading through their direct and indirect monitoring activities.
AB - Understanding the association between quasi-indexer ownership and insider trading is important given the externalities that insider trading can impose on shareholders, the importance of quasi-indexers in the capital markets, and their mixed monitoring incentives. The prior literature has produced an inconsistent set of results regarding this association. These results are difficult to interpret because the association between them is likely endogenous, and prior studies have not employed effective identification strategies to address this issue. In this study, we examine the effects of quasi-indexer institutional ownership on insider trading using the plausibly exogenous discontinuity in quasi-indexer ownership around the Russell 1000/2000 index cutoff. Using both regression discontinuity and instrumental variable research designs, we find higher quasi-indexer ownership leads to less insider trading (both buys and sells) and less profitable sell trades. The effects for sells are concentrated among insider trades that, ex ante, are more likely to be based on private information. Our evidence on the profitability of buys is mixed. In addition, we find firms with higher quasi-indexer ownership are more likely to have and/or more strictly enforce blackout policies. Overall, our results suggest that quasi-indexers can reduce the agency costs associated with insider trading through their direct and indirect monitoring activities.
KW - blackout policies
KW - causal effect
KW - insider trading
KW - quasi-indexers
KW - regression discontinuity
UR - http://www.scopus.com/inward/record.url?scp=85110387134&partnerID=8YFLogxK
U2 - 10.1111/1911-3846.12683
DO - 10.1111/1911-3846.12683
M3 - Journal article
AN - SCOPUS:85110387134
SN - 0823-9150
VL - 38
SP - 2192
EP - 2223
JO - Contemporary Accounting Research
JF - Contemporary Accounting Research
IS - 3
ER -