Religion and Insider Trading Profits

Abstract

We use the controversial aspect of insider trading to analyze the impact of local social norms on insiders’ profits. We argue that religiosity is a source of social norms curbing self-interested behavior and, accordingly, it limits corporate insiders’ opportunistic trading on private information. Our results confirm that trades by insiders in firms located in more religious areas are followed by lower abnormal returns, those insiders are less likely to trade on future earnings news, and their trades are less likely to be opportunistic. The effect is concentrated where the impact of local social norms is expected to be stronger – in geographically focused firms and in trades by officers. Higher religiosity decreases also the probability and volume of trading. We provide several tests to address potential endogeneity and to strengthen identification. Overall, we offer new insights into the effect of social norms on individuals’ financial decisions.