Corporate governance and informed trading

The purpose of this paper is to empirically study the relationship between informed trading and overall corporate governance mechanisms.

A broad range of governance characteristics are used to measure the governance structure of firms in the Toronto Stock Exchange. The risk of informed trading is estimated using a PIN measure that avoids biases induced by trade classification errors. Our proxies for informed trading are regressed on measures of corporate governance.

Our most important result is that the observed trade‐off between CEO compensation and informed trading holds only for large firms. There is no correlation between CEO cash compensation and the risk of informed trading in small and medium sized firms. We find evidence that cross‐sectional differences in the risk of informed trading are explained by a firm's governance structure.

Research finding a trade‐off between CEO compensation and informed trading merits closer examination.

Limitations on insider trading, and more broadly on informed trading, may involve different costs and benefits for large firms than for medium and small firms.

This paper expands the set of governance characteristics shown to interact with informed trading activity. The Toronto market is well suited to focusing on relations between informed trading and firm‐level governance characteristics.