CEO Marital Status and Insider Trading
| Published date | 01 October 2023 |
| Author | Prasad Hegde,Shushu Liao,Rui Ma,Nhut H. Nguyen |
| Date | 01 October 2023 |
| DOI | http://doi.org/10.1111/1467-8551.12673 |
British Journal of Management, Vol. 34, 1974–1991 (2023)
DOI: 10.1111/1467-8551.12673
CEO Marital Status and Insider Trading
Prasad Hegde,1Shushu Liao,2Rui Ma3and Nhut H. Nguyen4
1Department of Finance,AucklandUniversityof Technology, Auckland, 1010,NewZealand,2Department of
Leadership and Management, Kühne Logistics University, Hamburg,20457, Ger many, 3La Trobe Business
School, La TrobeUniversity, Bundoora, VIC, 3086, Australia, and 4Department ofFinance, Auckland
University of Technology, Auckland, 1010, New Zealand
Corresponding author email: shushu.liao@the-klu.org
We investigate the association between chief executive ofcers’ (CEOs’) marital status
and their tendency to prot from insider trading. Weargue that marriage can constrain
CEOs’ opportunistic behaviour, which could increase litigation risk, and showthat mar-
ried CEOs earn lower insider trading returns compared to unmarried CEOs. Insider
trades can be identied as either routineor opportunistic. We also nd that married CEOs
are less likely to engage in opportunistic trades, and they earn lower insider trading re-
turns in rms with weaker corporate governance and higher information asymmetry. Our
empirical results remain robust after accounting for severalendogeneity tests.
Introduction
There has been growing research related to the
impact of top managers’ life experiences on cor-
porate practices. These experiences include disas-
ter experience in chief executive ofcers’ (CEOs’)
early childhood (Bernile,Bhagwat and Rau, 2017),
military involvement (Benmelech and Frydman,
2015; Law and Mills, 2017), professional experi-
ence (Dittmar and Duchin, 2016), poverty experi-
ence (Zhang, Wang and Jia, 2021) and family life
(Cronqvist and Yu, 2017; Roussanov and Savor,
2014). In this paper,we focus on CEOs’ marital sta-
tus, which is arguably one of the most important
life experiences of an individual. The business and
nance literature has documented the signicant
effects of CEOs’ marital status on various corpo-
rate activities such as risk taking (Roussanov and
Savor, 2014), corporatesocial responsibility (CSR)
performance (Hegde and Mishra, 2019), nancial
reporting quality (Hilary, Huang and Xu, 2017)
and portfolio investment (Lu, Ray and Teo, 2016).
However, we are not aware of any existing research
that empirically examines the relationshipbetween
CEOs’ marital status and thetrading oftheir own
company’s stocks (i.e. insider trading) and the ex-
tent to which their insider trades are informed and
protable. Therefore, our study lls this gap.
Insider trading has long been a topic of inter-
est for researchers and regulators. Corporate in-
siders can trade their company’s shares for liquid-
ity or diversication reasons; however, it is illegal
to take advantage of material non-public infor-
mation about the rm and earn abnormal prot
through insider trading based on such informa-
tion (Section 10b5 of the Securities Exchange Act
of 1934). For example, Erickson (2010) nds that
about 60% of derivative lawsuits against directors
and ofcers contain allegations of illegal insider
trading. Although there is mixed empirical evi-
dence to support or oppose insider trading on the
grounds of market efciency (e.g. Aktas, de Bolt
and Van Oppens, 2008; Fernandes and Ferreira,
2009; Fishe and Robe, 2004; Huddart, Hughes
and Levine, 2001), it is argued that insider trad-
ing is neither fair nor economically efcient, since
it leads to an unlevel playing eld for uninformed
outside investors (see e.g. Werhane, 1989, 1991).
A free video abstract to accompany this article can be found online at: https://youtu.be/cJ5EGKz5PY8
A free Teaching and Learning Guide to accompany this article is available at: http://onlinelibrary.wiley.com/journal/
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© 2022 The Authors.British Journal of Management published by John Wiley & Sons Ltd on behalf ofBritish Academy
of Management.
This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distri-
bution and reproduction in any medium, provided the original work is properlycited.
Marriage and Insider Trading1975
Despite a gradual decrease in managerial stock
ownership over time, corporate managers still
hold, on average, 12% of the shares in the rms
they manage (Fabisik et al., 2021), and this rep-
resents a nontrivial proportion of their personal
wealth (Cohen, Malloy and Pomorski, 2012). This
high stake necessitates managers trading their
rm’s stocks from time to time and for different
motives. Researchers have provided evidence that
insiders trade on private information and earn ab-
normal prots (e.g. Billings and Cedergren, 2015;
Chen, Martin and Wang, 2013; Jeng, Metrick
and Richard, 2003). Cohen, Malloy and Pomorski
(2012) show that while insiders do not earn prof-
its for routine trades, they earn as much as 0.81%
monthly abnormal returns fromtrades that are de-
ned as opportunistic. Ahern (2017), in their hand-
collected data on insider trading networksfrom the
cases led by the SEC, nds that about 622 inside
traders made an aggregated $928 million in trad-
ing prots between 2009 and 2013 through shar-
ing inside information. However, it is challenging
for regulators and investors to interpret the infor-
mation content ofinsiders’tradesandassess which
trade is illegal. At the same time,the ambiguity and
uncertainty in the legal space in determining what
constitutes an illegal trade also poses challenges
for insiders in their decisions to take litigation risk
and trade on private information (Jiang, Wintoki
and Xi, 2021).
In our paper, we focus on CEOs, arguably the
most important group of insiders, and their mar-
ital status to examine whether the characteristics
embedded in this status affect their insider trading
behaviour. Social and family studies have shown
that marriage is associated with an individual’s
social virtue, well-being, relational responsibil-
ity and tendency to avoid risky behaviours (e.g.
Garrison, 2007; Greenberg, 1998; Notare and Mc-
Cord, 2012; Persson, 2020; Sampson, Laub and
Wimer, 2006). Business and management research
argues that individual attributes such as attitudes
to risk affect insider trading performance (Hillier,
Korczak and Korczak, 2015). We argue that a
CEO’s normative commitment to married life can
negatively relate to the CEO’s risk appetite, which
is consistent with existing evidence that married
CEOs are less likely to implement risky decisions.
For example, Roussanov and Savor (2014) and
Hilary, Huang and Xu (2017) show that married
CEOs are more risk averse than single CEOs, and
this is reected in more conservative corporate
policies and a lower degree of earnings manage-
ment. In addition, there is evidence that insiders
change their trading behaviour due to litigation
risk (e.g. Billings and Cedergren, 2015; Cheng
and Lo, 2006; Chen, Martin and Wang, 2013).
Typically, Seyhun (1992) and Huddart, Ke and
Shi (2007) nd that insiders are less likely to trade
immediately before major events such as earnings
and takeover announcements, while Chen, Martin
and Wang (2013) show that managers reduce their
insider selling activity if their rms are to receive
a going-concern opinion from the auditors. Ad-
hikari, Agrawaland Shar ma (2019) document that
shareholders’ ability to sue corporate insiders for
their allegedly illegal trades has a signicant im-
pact on insiders’ opportunistictrading.Given that
litigation risk may potentially have damaging ef-
fects on married CEOs regarding unemployment,
reputation, disruption in their ability to meet fam-
ily consumption commitment and erosion in the
quality of family and children’s life (e.g. Bradley
and Corwyn, 2002; Ribar, 2015; Roussanov and
Savor, 2014), we expect that married CEOs are
more likely to abstain from information-driven
insider trading than single CEOs.
To test our ideas, we use a large sample of
insider trading transactions made by CEOs of
US public rms from 1996 to 2019. Following
Jagolinzer, Larcker and Taylor (2011), we capture
CEOs’ trading protusing the alpha from the four-
factor Famaand French (1992) and Carhart (1997)
model during the 180-day window following their
purchase or sale transactions. We obtain marital
information for CEOs from Roussanov and Sa-
vor (2014) and the Marquis Who’s Who in Fi-
nance and Industry database. Our analyses show
that married CEOs earn lower future abnormal re-
turns compared to unmarried CEOs (which covers
primarily single CEOs). Our results are robust to
the exclusion of CEOs with divorced or deceased
spouses. The results support our main argument
that married managers are less likely to conduct
informed insider trading for gains relative to sin-
gle (or unmarried) CEOs.
Our results remain strong after several ro-
bustness checks and endogeneity tests. To fur-
ther conrm that our inferences are not driven
by rm-level unobserved heterogeneity, we em-
ploy a difference-in-differences (DiD) methodol-
ogy by identifying those rms that experience
© 2022 The Authors.British Journal ofManagement published by JohnWiley & Sons Ltd on behalfofBritish
Academy of Management.
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