Executives, directors and other corporate insiders have privileged access to material non-public information. Previous research shows that trades by insiders are informed, on average. For example, insider purchases tend to precede positive stock returns. In addition, like other investors, corporate insiders may have different investment horizons (i.e., anticipated stock-holding periods) when they trade their company’s stock, depending on their personal investment objectives and styles; desire for liquidity, diversification, or corporate control;, compensation contracts; or understanding and attitude toward insider trading laws.
How does legal knowledge affect corporate insiders’ trading behavior? Do corporate insiders with law degrees trade differently from others? On the one hand, with a better understanding of regulations, legal insiders are more aware of the effects and risk of litigation associated with their behavior, and they may be more hesitant to make use of their private information. Also, reputation risk may make legal insiders more conservative in using non-public information for personal benefits. In this case, legal insiders would make less profit when they make inside transactions. On the other hand, legal training might help legal insiders to obtain … Read more