Title: Illegal insider trading and corporate governance

Authors: Ajit Dayanandan; Han Donker; Mike Ivanof

Addresses: Department of Economics, University of Northern British Columbia, 3333 University Way, Prince George, British Columbia, V2N 4Z9, Canada ' Department of Accounting, University of Alaska Anchorage (UAA), College of Business and Public Policy (CBPP), 3211 Providence Dr, Anchorage, Alaska, 99508-4614, USA ' Entrepreneurship and Innovation Management, School of Business, University of the Fraser Valley, 33844 King Road, Abbotsford, British Columbia, V2S 7M8, Canada

Abstract: This empirical study examines the role of corporate boards, ownership structure, and executive pay on illegal insider trading in the Netherlands. We use a unique dataset received from the prosecutor of financial crime in the Netherlands. The results of our study show that monitoring of large institutional shareholders and other blockholders, as well as board independency and board size reduce illegal insider trading. The study also confirms the entrenchment hypothesis that managerial shareholdings between 5-25% and executive compensation in the form of stock options positively impact illegal insider trading. Our paper validates some of the moral hazard problems associated with stock compensation schemes in corporate episodes in the 1990s and during the financial crisis in 2008, and points to the policy choices in framing new regulations in the corporate and financial landscape.

Keywords: illegal trading; insider trading; corporate governance; executive compensation; asymmetric information; corporate boards; ownership structure; executive pay; The Netherlands; shareholder monitoring; large institutional shareholders; blockholders; board independence; board size; stock options; moral hazard; stock compensation.

DOI: 10.1504/IJCG.2014.062343

International Journal of Corporate Governance, 2014 Vol.5 No.1/2, pp.1 - 21

Received: 15 Feb 2014
Accepted: 15 Feb 2014
Published online: 30 Apr 2015 *

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