Policy risk and insider trading

• Published in: Journal of empirical finance Vol. 72; pp. 341 - 353
• Main Authors: Akbulut, Mehmet E., Ucar, Erdem
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01-06-2023
• Subjects: Insider trading; Local policy risk; Political geography; Political uncertainty; Local policy risk; Insider trading; Political uncertainty; H1; Political geography; G14; G18
• ISSN: 0927-5398; 1879-1727
• DOI: 10.1016/j.jempfin.2023.04.002

Prior research has examined the influence of political geography on finance through an analysis of local policy risk and has shown that investors recognize and factor it into their pricing decisions. We contribute to this literature by examining whether managers recognize and respond to local policy risk. We use managerial insider trading as a test environment and show that managers respond to this risk by actively trying to reduce their exposure to it. We find that managers abnormally increase their insider sales when local policy risk is high. The effect of local policy risk on insider trading increases after the presidential elections if the firm’s state becomes more politically aligned with the President as a result. The effect is weaker for firms with PAC contributions or firms located closer to state capitals with potentially stronger political connections.
•We examine whether managers recognize and respond to local policy risk.•Managers abnormally increase their insider sales when local policy risk is high.•The effect increases if a firm state is more politically aligned with the President.•The effect is weaker for firms with PAC contributions with political connections.•The local policy risk effect is also weaker for firms closer to state capitals.