Corporate Social Responsibility Orientation and Insider Trading: The Role of Reputational Costs

• In Event: The Role of Regulation, Litigation and Ethics in Constraining Managers

Abstract

We investigate the constraining effect of reputational concerns on insider trading by examining whether a firm’s corporate social responsibility (CSR) orientation affects executives’ insider trading activities. CSR investments likely increase firms’ reputational capital and therefore the reputational costs of informed insider trading. As a result, we expect that executives of CSR conscious firms are more likely to be constrained from informed trading. Consistent with this expectation, we find that executives of CSR conscious firms make significantly lower profits from insider trades than executives of non-CSR conscious firms. We also find that executives of socially responsible firms are less likely to trade on future corporate news events. Collectively, our results provide evidence consistent with reputation costs constraining insider trading.

Authors

• Feng Gao, University of Illinois at Chicago

• Ling Lisic, George Mason University

• Ivy Zhang, University of Minnesota, Twin Cities Campus