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Insider trading and shareholder investment horizons

Tian (Lori) Tang, PhD X. Fu L. Kong X. Yan
Journal of Corporate Finance (Forthcoming)

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This paper examines the effect of shareholder investment horizons on insider trading. We find that insiders use less strategic trading patterns to exploit their informational advantages and have lower trading profitability when shareholder investment horizons are longer. These findings are
consistent with the notion that long-term institutional shareholders have more incentives and efficiency in monitoring. We provide additional evidence supporting this notion by showing that long-term investors’ monitoring is a substitute for monitoring from independent board and hedge fund activists, is stronger with higher ex-ante litigation risk, and enhances information disclosure. These results generally hold across different types of insiders. We address the potential endogeneity issues by examining the subsample with high institutional ownership, distinguishing the plausible exogenous quasi-indexes from the plausible endogenous non-indexers, and employing the actual Russell 1000/2000 index switches as a source of exogenous variations in shareholder investment horizons.

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