Theses and Dissertations

Issuing Body

Mississippi State University

Advisor

Blank, Douglas Brian, II

Committee Member

Cline, Brandon N.

Committee Member

Highfield, Michael J.

Committee Member

Taboada, Alvaro G.

Committee Member

Campbell, Randall C.

Date of Degree

8-9-2022

Document Type

Dissertation - Open Access

Major

Finance

Degree Name

Doctor of Philosophy (Ph.D)

College

College of Business

Department

Department of Finance and Economics

Abstract

I study how insider trading interacts with the political economy, regulators, and other corporate governance mechanisms. In the first section, I examine the impact of insider trading restriction enforcement on firm innovation. U. S. Securities and Exchange Commission enforcement actions are intended to protect investors and limit expropriation by firm insiders, but enforcement could impact insiders’ incentives to contribute to value enhancing activities. Therefore, I explore how corporate innovation and performance respond to insider trading restrictions imposed by firms and regulators. Using manually collected data on SEC indictments against corporate insiders, I document more innovative activity following external insider trading restrictions. External restrictions are also followed by higher corporate investment, capital access, and operating performance. Similarly, internal blackout restrictions to insider trading are also linked to more patents. SEC and congressional rule changes serve as quasi-natural experiments resulting in shocks in enforcement and indictments for identification and inference. Overall, the results suggest insider trading restrictions and enforcement actions impact subsequent firm activities and managerial decisions by protecting outside investment, resulting in more investment and innovation. In the second section, I explore the relation between political uncertainty and insider trading. With political uncertainty elevated recently, I examine the role of political uncertainty among insiders. By measuring firm-specific political risk measured from conference calls, I observe insiders trade more actively during uncertain periods with trading volume and transaction value increasing alongside political uncertainty. The results are driven by non-routine insider transactions and purchases at firms with CEO duality and fewer insider trading restrictions. Next, I observe similar results when exploiting variation in election timing across states and alternative external measures. Moreover, I find evidence of informed insider trading by observing higher abnormal returns following insider trades amidst political uncertainty. Finally, I find political uncertainty is linked to lower bid-ask spreads and leverage but observe higher outstanding shares with more insider trading when experiencing positive political uncertainty, consistent with insiders informing markets and improving liquidity. Overall, these results suggest insiders purchase more actively and opportunistically amidst political uncertainty, improving market information quality, especially when internal governance is accommodating.

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