Feng Gao, Ling Lei Lisic, and Ivy Zhang
Commitment to Social Good and Insider Trading
Journal of Accounting and Economics | Volume 57, Issue 2-3 (Apr-May 2014), 149–175

Corporate social responsibility (CSR) has gained tremendous attention from regulators, corporate executives, investors, and various other stakeholders in recent years. Our study documents an unintended consequence of these increasingly important corporate activities. We find that a firm's commitment to CSR constrains executive self-serving behavior as manifested in insider trading.

CSR Reputation and Insider Trading

When a firm commits to be socially responsible, the positive image imposes costs on managers engaging in self-serving activities, such as insider trading, that conflict with the appearance of doing social good. Informed trading is prohibited by law and often considered greedy and unfair expropriation of uninformed investors. When informed trading is detected, the negative publicity likely impairs the firm's positive social image and reduces the associated benefits, eventually causing damage to managers' personal interests that are tied to the image of the firm. We thus expect that a firm's socially responsible image constrains profitable insider trading.

A firm's CSR engagement can also be negatively associated with insider trading if both corporate CSR policies and executives' insider trading reflect executives' personal preferences to be a good citizen. Socially responsible executives are less likely to pursue self-serving actions such as informed trading.

Using the social ratings data issued by MSCI ESG STATS from 1991 to 2010, we measure a firm's commitment to social good with a summary CSR score that reflects various aspects of social responsibility, including environment, community affairs, employee relations, diversity, customer relations and involvement in controversial industries. A firm is considered CSR-conscious if it has more CSR strengths than concerns. We focus on insider purchases only because on average executives profit from purchase transactions but not from sale transactions. We measure executives' insider trading profits as potential profits gained from purchases.

Table 1 reports the trading profits of executive purchases in CSR-conscious firms versus non-CSR-conscious firms. The mean daily trading profits from purchases made by executives of non-CSR-conscious firms are 0.0564% for the 180-day window, 0.0813% for the 120-day window, and 0.0916% for the 90-day window. In contrast, the mean daily trading profits from purchases made by executives of CSR-conscious firms are 0.0402%, 0.0604%, and 0.0621%, respectively. The trading profits from purchases made by executives of non-CSR-conscious firms are at least 35% higher than those from purchases made by executives of CSR-conscious firms, and all differences are statistically significantly at the 1% level. These results suggest that executives of CSR-conscious firms profit significantly less than executives of non-CSR-conscious firms from insider trading. Further analyses of changes in a firm's CSR orientation suggest that executives make lower trading profits as a firm becomes CSR conscious and they make higher trading profits as a firm becomes non-CSR-conscious.

1: CSR and Insider Trading Profits
Mean Median
(%) (%)
CSR-conscious firms
Profit (t + 180) 0.0402 0.0374
Profit (t + 120) 0.0604 0.0577
Profit (t + 90) 0.0621 0.0537
Profit (t + 180) 0.0564 0.0524
Profit (t + 120) 0.0813 0.0739
Profit (t + 90) 0.0916 0.0861
Profit (t + 180) –0.0163 –0.0149
Profit (t + 120) –0.0209 –0.0162
Profit (t + 90) –0.0296 –0.0325
This reports the mean and median of trade-specific daily returns on four common factors over the 180, 120, and 90 days following executives' insider purchases. The difference in trading profits between CSR-conscious and non-CSR-conscious firms (i.e., the bolded numbers) are statistically significant at 1% level.

We obtain similar inferences with the likelihood of executive trades prior to future corporate news. We find that executives of non-CSR-conscious firms trade on future corporate news contained in earnings and stock returns. However, we do not find such evidence for executives of CSR-conscious firms. Further analyses of changes in CSR orientations also indicate that executives trade on future corporate news before a firm becomes CSR conscious, but not afterwards, and after a firm ceases to be CSR conscious, but not beforehand.

Channels of CSR Impact

We next explore channels through which damage to a firm's CSR image translates into personal costs for executives and thus discourages informed trading. First, executives gain personal reputational capital from corporate activities when executives are vocal (or visible) with regard to the firm's CSR activities. We thus expect the firm's CSR orientation to have a stronger constraining effect on these executives' trading. In addition, if being vocal about CSR reveals that these executives are more altruistic or less greedy, we would also expect them to refrain more from informed trading. We determine whether executives are vocal about CSR via a comprehensive search of the internet, news media, press releases, and CSR reports. Consistent with our expectation, we find the constraining effect of CSR on insider trading profits to be stronger for CSR advocates.

Second, damage to the CSR image of the firm can hurt executives through their stock ownership. We find the constraining effects of CSR to be more pronounced when executives' wealth is more closely tied to firm value, i.e. when they hold more company shares.

Personal Preferences?

The negative relation between CSR and insider trading could be explained by both CSR image constraining insider trading and managerial preferences for good citizenship. After controlling for executives' personal styles, our results suggest that the constraining effects of CSR image are not subsumed by individual preferences.

Concluding Remarks

Our paper advances the understanding of the impact of committing to social good on self-serving managerial behavior. We document a robust negative association between a firm's CSR consciousness and executive insider trading. Various analyses suggest that the CSR image can act as an unintended governance mechanism restricting informed trading. We add to the growing literature on the implications of CSR engagement. We also contribute to the insider trading literature by proposing an additional constraint on informed trading other than regulation and corporate insider trading policies.