Political Connections and Insider Trading

The media, investors, and regulators often consider trading by corporate insiders to be a signal of firm value, given that insiders know their business better than do others. Although trading on material, non-public information can be illegal in the U.S., insiders may still attempt to profit from their informational advantage, as evidenced by dozens of insider trading enforcement actions each year.

Research also suggests that politically connected firms may avoid investigations by, or receive lower penalties from, regulatory agencies. And since insiders are the ones who decide to build political connections for the firms, they may do so to seek … Read more