Moderating effects of information asymmetry on relationship among future firm performance, corporate governance and insider trading

• Main Author: Yasmin, Jamadar
• Format: Thesis
• Language: English
• Published: 2022
• Subjects: Disclosure of information; Information theory in finance; Corporate governance
• Online Access: http://psasir.upm.edu.my/id/eprint/105539/1/SPE%202022%204%20UPM%20IR.pdf; http://psasir.upm.edu.my/id/eprint/105539/

Corporate insiders have privileged access to the private information of their own firms. Therefore, insiders are driven by superior information about firms' future earnings in order to earn abnormal returns. In addition, insider generates significant abnormal returns in companies with weak corporate governance rules. This study investigates the relationship between future firm performance and insider trading using a sample of 4060 US non-financial firms from 2010 to 2018. Also, this study examines the relationship between corporate governance and insider trading. Moreover, using the signalling theory, this study investigates the relationship between future firm performance and insider trading with the moderating effect of information asymmetry. Next, the relationship between corporate governance and insider trading with the moderating effect of information asymmetry using the agency theory is also examined. This study examines whether insiders earn more profit in an asymmetric information environment from their informed trades and whether the moderating information asymmetry influences the relationship between future firm performance and insider trading. The findings reveal that insiders use the information on future firm performance not known to the market to engage in trading. The abnormal returns earned from insiders' trades are primarily tied to preferential and favoured access to superior private information about firms' future performance. Moreover, the findings contend that information asymmetry leads to greater uncertainty and more insiders trading. Insiders engage in more trading because of higher information, confirming the moderating role of information asymmetry. Further, this study reveals that corporate governance mechanisms decrease the profitability of insider trading. This study also finds that governance mechanisms that encourage the monitoring of managers are inversely related to information asymmetry. Specifically, the board independence and compensation committee are significantly and inversely related to the information asymmetry and play an essential role in reducing the ii profitability of insider trading. An independent board of directors encourages the monitoring of managers, thereby making it difficult for managers to conceal shirking personal perquisite consumption. On the other hand, an optimal compensation structure restricts insider trading under agency theory, suggesting that good corporate governance plays a critical role in reducing the informational advantage for mitigating the profitability of insider trading. Hence, the incremental effect of information asymmetry is prevalent in both of these relations, confirming the moderating effect of information asymmetry. The findings have significant implications for insider trading in the US market. The findings will benefit regular shareholders who lack insider information and must depend solely on publicly available data because the study focuses on publicly available data. Furthermore, this study will help companies and regulators to monitor and control insider knowledge and insider trading activities by strengthening the corporate governance structure. The findings will also help to set up a fair trading market to promptly disclose relevant information to outsiders to maintain and protect minor shareholders’ equal access to information.