Insiders’ Other Trades

We study trading by corporate insiders in stocks where they are not insiders and the moderating role of the governance in their own firms. Insider trading is illegal in most countries, but it is difficult to enforce. Research finds that governance is effective in constraining insiders from utilizing their private information to trade profitably in their own stock. However, to the extent that their information has spillovers in the form of industry news or peer firm news, insiders can trade in these other stocks. We find that controlling for individual stock-picking ability, insiders earn higher abnormal profits in stocks from their own industry (related stocks) relative to stocks from other industries (unrelated stocks). The information advantage of insiders in related stock arises from industry news rather than firm-specific news. Insiders in better-governed firms trade less profitably in their own stock but exploit industry-specific information better while trading in related stocks. Our results suggest that strong governance may drive an insider to trade in related stocks instead of trading in their own stock. We also show that the insider’s information advantage is higher when accounting comparability between the insider’s own stock and related stock is high