Does Social Trust Mitigate Insiders’ Opportunistic Behavior? Evidence from Insider Trading

We investigate whether social trust can mitigate insider trading profitability. Our empirical evidence shows that social trust surrounding corporations’ headquarters is negatively associated with corporate insiders’ ability for trading gains. This relation holds in a range of tests including instrumental variable methods and using social trust value from CEO’s birthplace. We further find that social trust plays a more important role in curbing insiders’ trading profitability when firms have a higher level of information asymmetry, poorer corporate governance, and when firms are non-State-owned. Finally, we show that firms headquartered in high social trust regions tend to engage in more investor communication, have a lower probability to restate financial statements, and have lower stock price synchronicity.