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Do co-opted boards increase insider profitability?

Journal Article


Abstract


  • Using a sample of U.S. firms over the period 1996–2014, this paper examines whether insider trading profitability increases with high board co-option. Indeed, we find that firms with a higher level of co-opted directors exhibit higher insider trading profitability, largely due to a lower level of managerial ability and analyst coverage. Co-opted boards are also unlikely to implement self-imposed insider trading restrictions, exacerbating this relationship. This positive association is mitigated by a higher level of external monitoring by institutional investors and if the CEO receives more performance-based incentives. Overall, co-opted directors demonstrate aligned interests with CEOs and corporate insiders rather than performing their role as monitors. As a result, a more co-opted board is positively associated with exploitative behaviour of insiders.

Publication Date


  • 2021

Citation


  • Rahman, D., Malik, I., Ali, S., & Iqbal, J. (2021). Do co-opted boards increase insider profitability?. Journal of Contemporary Accounting and Economics, 17(3). doi:10.1016/j.jcae.2021.100265

Scopus Eid


  • 2-s2.0-85110062609

Volume


  • 17

Issue


  • 3

Abstract


  • Using a sample of U.S. firms over the period 1996–2014, this paper examines whether insider trading profitability increases with high board co-option. Indeed, we find that firms with a higher level of co-opted directors exhibit higher insider trading profitability, largely due to a lower level of managerial ability and analyst coverage. Co-opted boards are also unlikely to implement self-imposed insider trading restrictions, exacerbating this relationship. This positive association is mitigated by a higher level of external monitoring by institutional investors and if the CEO receives more performance-based incentives. Overall, co-opted directors demonstrate aligned interests with CEOs and corporate insiders rather than performing their role as monitors. As a result, a more co-opted board is positively associated with exploitative behaviour of insiders.

Publication Date


  • 2021

Citation


  • Rahman, D., Malik, I., Ali, S., & Iqbal, J. (2021). Do co-opted boards increase insider profitability?. Journal of Contemporary Accounting and Economics, 17(3). doi:10.1016/j.jcae.2021.100265

Scopus Eid


  • 2-s2.0-85110062609

Volume


  • 17

Issue


  • 3