Interrelationship between insider trading and managerial attributes

The thesis consists of three independent and interrelated research papers that contribute to a better understanding of market responses to insider behaviours and contribute to prior literatures on information asymmetries. The first research aims to investigate the impacts of the firms’ executive pay disparity on the insider trading prior to corporate earnings disclosures. By testing two competing hypotheses: the managerial power hypothesis and the tournament hypothesis, the research finds a robust evidence supporting the managerial power hypothesis that insiders in large CEO pay disparity firms tend to exploit inside earnings news to profit their stock purchases, and show a supportive evidence for the tournament hypothesis that insiders in large CEO pay gap firms are less likely to profit from their stock sales. The second research, therefore, investigates whether the insider returns are credible signals for CEO turnovers and determines the role of CEO pay disparity in the relation to the departure of CEO. The results show that an increase in the return of insider purchases credibly signals for CEO entrenchment, while a significant and positive association between insider selling returns and CEO turnover indicates that an increase in returns from top management team stock sales is a signal for the likelihood of CEO dismissal. In addition, the study shows that lower pay disparity can demotivate other executives to compete for the CEO position, thereby instigating them to seek for other incomes, such as, exploiting inside information. Finally, the third research examines the impacts of insider trading and managerial attributes on future stock price crashes. The study demonstrates a positive relation between insider purchases and price crash risk implicating that other than compensation and career concerns, insiders hoard bad news to fulfil their trading incentives while the positive coefficients of insider sales suggest insiders can assess and anticipate the future crash risk. The research further documents that the presence of female directors on board can mitigate stock price crash risk, whereas, firms with powerful or younger CEOs are more likely to experience crashes. Overall, the thesis provides empirical evidence on the interrelationship between corporate insider trading and managerial attributes including CEO power, CEO characteristics, and Board diversity. The findings highlight the importance of the corporate managerial attributes for firm policies in dealing with information asymmetry problem and are recommended to financial managers who takes the responsibility to shape the corporation disclosure policy and regulations.