Social Capital and Insider Trading

Abstract

Using a large U.S. dataset on insider purchases and variations in the social capital of U.S. counties, we find that the intensity (profitability) of insider trading is positively (negatively) associated with social capital. These results are more pronounced when we restrict our sample to include only opportunistic (rather than routine) insider purchases. Our results indicate that insiders affiliated with firms headquartered in counties with high levels of social capital are relatively more likely to foster market information efficiency by making additional insider purchases. However, they are less likely than those affiliated with firms outside such counties to time the market to increase the profitability of their insider purchases. Furthermore, we address endogeneity issues and establish that these relationships are causal by applying an instrumental variable approach. Finally, we show that the main driver of the positive (negative) relationship between the intensity (profitability) of insider purchases and social capital is the density of social networks (the strength of civic norms).