📖 Daily Journal | Religion and insider trading profits

✍🏻️ Author: Harold Contreras, Adriana Korczak, Piotr Korczak

📖 Source: Journal of Banking and Finance, Volume 149, April 2023

Introduction

The article "Religion and Insider Trading Profits" published in the Journal of Banking and Finance explores the impact of religiosity and social norms on insider trading profits. The study focuses on how local social norms, particularly those influenced by religion, can curb self-interested behavior among corporate insiders, thereby affecting their trading practices and profitability.

Discussion

The article delves into the intriguing intersection of religiosity, social norms, and insider trading within the context of corporate governance. The study addresses the problem of opportunistic trading on private information by corporate insiders and seeks to understand how local social norms, particularly those influenced by religion, can act as a deterrent to such behavior. By examining the impact of religiosity on insider trading profits, the research sheds light on the role of social norms in shaping financial decision-making within firms.

The study's findings are based on an analysis of insider trading data from firms located in different religious areas, drawing from the Thomson Reuters Insider Filing Data Feed. The researchers argue that religiosity fosters social norms that discourage self-interested behavior and promote ethical conduct. This leads to the formulation of the hypothesis that social norms associated with religiosity reduce opportunistic, self-interested trading on private information, ultimately resulting in lower insider trading profits in firms located in more religious areas.

The research employs a rigorous methodology to analyze insider trading profitability, considering factors such as size-and-book-to-market-adjusted buy-and-hold abnormal returns (BHAR) over 180 trading days from the date of the trade. The study also takes into account supplementary stock market and accounting data from CRSP and Compustat, ensuring a comprehensive analysis of insider trading practices and their financial implications.

Conclusion

The study's conclusions reveal compelling insights into the impact of religiosity on insider trading profits. It demonstrates that trades by insiders in firms located in more religious areas are associated with lower profits, reduced likelihood of trading on future earnings news, and less opportunistic behavior. Importantly, the research highlights that the effect of religion on insider trading profitability holds across different levels of disclosure environments and is particularly pronounced in firms with weaker corporate governance structures.

These findings have significant implications for corporate governance and ethical trading practices. The study suggests that local social norms, influenced by religiosity, play a crucial role in shaping the behavior of corporate insiders and can act as a deterrent to opportunistic trading practices. This underscores the importance of considering social and cultural factors in understanding financial decision-making within organizations and the broader implications for corporate governance.

In summary, the research provides valuable insights into the influence of social norms, particularly those influenced by religion, on insider trading practices and profitability. By highlighting the role of religiosity in shaping ethical conduct and financial decision-making within firms, the study contributes to a deeper understanding of the complex interplay between religion, social norms, and financial behavior.