Journal of Business & Financial Affairs

The Impact of Firm-Level Shareholder Protections on Abnormal Returns on Insider Trading

Abstract

Christopher von Koch, Ola Nilsson, Micael Jönsson, Jeff Anderssonand and Erik Matthiesen

This study is the first to investigate the relationship between firm-level shareholder protections and abnormal returns on insider trading. We thereby extend the few studies that have analysed insider trading from a shareholder protection perspective. The novelty of this study is its concentration on firm-level shareholder protection. Our results show that firmlevel shareholder protections have a significantly positive impact on abnormal returns on insider purchases, indicating that firm-level shareholder protection is more influential than country-level shareholder protection. We found support that the information content hypothesis is valid for explanation of abnormal return on insider trading, which is in line with earlier studies. This result is an indication that insider purchases in firms that have adopt strict corporate governance rules are viewed by the market as trustworthy leading to positive market reactions on insider trading.