Network Centrality, Connections, and Information: Evidence from CEO Insider Trading Gains

CEO’s insider trading gains are affected by the position of the CEO within the hierarchy of all business executives, as assessed by the CEO’s network centrality. CEOs with high centrality are associated with significantly more positive abnormal returns following purchases of their company’s stocks, compared to the CEOs with low centrality. These results hold even after considering potential endogeneity, and CEO personal characteristics and firm determinants related to network centrality. High-centrality CEOs earn higher abnormal returns following their share purchases primarily in firms that are riskier, have weak corporate governance, or are managed by a CEO with no career background in finance. High centrality CEOs also generate more significant personal gains by selling their shares prior to bad news event experienced by their firm. Finally, trading gains are further positively affected by CEO having past connections to the current CFO. Our findings suggest high network centrality, as well as bilateral connections to people with financial knowledge, allow CEOs to more efficiently gather information about the value of their company.