For the rich, for the poor: Why married CEOs are less prone to risky investments and insider trading
Invested in own business
Business leaders can invest a significant portion of their personal wealth in their business and can be compensated in company shares in addition to their own salary.
Although CEO share ownership has declined over time in the United States, on average, CEOs still own 12% of company stock. This means that managers sometimes have to trade stocks in their own company, for various reasons.
But despite regulations designed to discourage insider trading, it is still difficult for regulators and other investors to interpret these reasons: are the trades driven by a legitimate need for liquidity or diversification, or are they informed by non-public information about the title?
At the same time, legal ambiguity and uncertainty about what constitutes illegal trading also affects the decisions of potential insiders. Even when insider trading is technically legal, it still carries the threat of litigation from the United States Securities and Exchange Commission (SEC).
Marriage and insider trading
Our study provides new insights into whether a CEO’s marital status affects their behavior when trading company stock.
Examining the trading behavior of 1,100 executives of publicly traded companies in the United States between 1996 and 2019, we found that marital status appeared to have a significant influence on insider trading patterns. Overall, we found that:
married CEOs made significantly lower insider trading profits than their unmarried counterparts
married CEOs were less likely to engage in opportunistic occupations (as opposed to routine occupations) than unmarried CEOs
unmarried CEOs earned higher insider trading profits when they worked for companies with poorer corporate governance mechanisms or reporting quality.
One possible explanation for this is that married CEOs are simply more likely to avoid insider trading because they don’t want to risk their jobs and let their families down by being sued.
In other words, our results suggest that a CEO’s commitment to married life is correlated with lower risk appetite.
Marriage as a Regulator
Insider trading can clearly be a means of increasing the personal wealth of CEOs, as they can convert their shares into cash.
Research shows that insider traders can earn, on average, a 10% higher return than an average investor in a stock index.
CEOs who use inside information for personal gain obviously create an uneven playing field that disadvantages other investors and stakeholders. It is therefore useful to be able to identify the characteristics that could predict an increased propensity for opportunistic behavior.
If married CEOs display less opportunistic behavior than unmarried CEOs, this suggests that the social institution of marriage plays a positive – albeit under-examined – role in regulating business behavior at the individual and company level. company.
A single indicator
Although our study suggests a causal link between CEO marital status and insider trading, it is not the only indicator of probable behavior.
Marriage simply helps determine an executive’s potential appetite for risk. In this context, it can be seen as one of the traits (similar to education level or personality type) that is correlated with such behaviors.
Our findings should not be interpreted as a prescription for company hiring policies. Risky behavior can also fuel innovation, boost momentum and help improve business performance.
However, our study provides evidence that marital and family involvement can be a good predictor of a CEO’s risk preferences – particularly with respect to opportunistic insider trading and the risk of litigation that arises from it.
This article is republished from The Conversation under a Creative Commons license. Read the original article here.