Does social trust mitigate insiders' opportunistic behaviors? Evidence from insider trading

Does social trust restrain or exacerbate the opportunistic behaviors of corporate insiders? On the one hand, insiders susceptible to a high-trust environment will be less opportunistic; on the other hand, unethical insiders may exploit high-trust people to engage in more opportunistic behaviors. This paper tests the two competing hypotheses by investigating how trust surrounding corporate headquarters affects insider trading profitability, assuming that opportunistically informed trades have higher trading profits. We show that social trust negatively affects insiders' trading gains. This relationship holds after instrumental variable regressions and a difference-in-difference framework. Additionally, the role of trust is more prominent when insiders face more trading opportunities from information asymmetry, weak monitoring, and concentrated ownership structure; however, the impact of trust attenuates when formal regulations are in place. We also examine the indirect channels, including cautious financial reporting, informative disclosure, and active communications with investors through which social trust can deter informed trading. Our findings suggest that social trust can discourage opportunistic proclivity and spur more ethical deeds among managers.