Corporate Social Responsibility and Insider Trading:
The Role of Reputational Costs
Abstract
We investigate the constraining effects of reputational concerns on insider trading by
examining whether a firm’s corporate social responsibility (CSR) orientation affects
executives’ insider trading activities. To the extent that CSR activities increase a firm’s
reputational capital and therefore the reputational costs of informed trading, executives of
CSR conscious firms are likely more constrained from insider trading. Consistent with
this, we find that executives of CSR conscious firms make significantly lower profits
from insider purchases than executives of non-CSR conscious firms. We also find that
executives of CSR conscious firms are less likely to trade on future corporate news.
Collectively, our results provide evidence suggesting that reputational costs constrain
insider trading.
Keywords: corporate social responsibility, insider trading, reputation
JEL Classification: M14, D82, G10
1. Introduction
Corporate executives have incentives and disincentives to trade on their insider
information. While they can make significant profits from informed trades, they also face
various constraints. The literature has so far focused on the constraints imposed by
regulations and firm-level policies (e.g., Seyhun, 1992; Bettis et al., 2000; Jagolinzer et
al., 2011). The constraining effects of reputational concerns, on the other hand, although
often conjectured (e.g., Manne, 1985; Piotroski and Roulstone, 2008), lack empirical
support. We fill this gap by investigating whether a firm’s reputational capital created by
its corporate social responsibility (CSR) activities constrains executives’ insider trading
behavior.
There is ample evidence that insider trading brings significant financial gains to
corporate executives (e.g., Finnerty, 1976; Ravina and Sapienza, 2010; Jagolinzer et al.,
2011). These profitable trading activities, however, are commonly perceived as a result of
insiders “unfairly” exploiting their private information at the expense of uninformed
shareholders (e.g., Schotland, 1967). This appearance of impropriety raises significant
negative sentiment against insider trading among regulators, media, and the general
public. Consequently, firms and executives often experience substantial negative
publicity when information-based trading is detected and revealed (Bettis et al., 2000).
Such negative publicity and the resulting reputational losses likely have a deterring effect
on informed trading (Manne, 1985; Piotroski and Roulstone, 2008). Ceteris paribus, we
expect that executives of firms with more reputational capital, thereby having more to
lose from negative publicity, to profit less from insider trading.
On the other hand, CSR activities, which have become an issue of growing
interest for regulators, investors, and other stakeholders in recent years, are widely
1
viewed as a firm’s strategic investment in reputation building and maintenance (Fombrun
and Shanley, 1990; McWilliams et al., 2006; Linthicum et al., 2010). A recent survey of
Fortune 1000 executives reveals that reputation is the primary motivation behind CSR
initiatives (Adam Friedman Associates, 2012). The literature also suggests that CSR
activities enhance a firm’s reputation by raising brand value, customer awareness, and
investor appreciation (Brown and Dacin, 1997; Servaes and Tamayo, 2012; Rosen et al.,
1991). To the extent that CSR conscious firms have more reputational capital at stake and
therefore higher reputational costs associated with insider trading than non-CSR
conscious firms, we expect that their executives are more constrained from profiting from
informed trades.
We measure a firm’s CSR orientation by examining the social ratings data issued
by MSCI ESG STATS (MSCI hereafter; previously known as KLD) from 1991 to 2010.
Similar to the extant literature (e.g., Hong and Kostovetsky, 2012; Kim et al. 2012), we
assess a firm’s CSR performance with a summary CSR score that reflects various aspects
of social responsibility, including environment, community, employee relations, diversity,
customers, and involvement in controversial industries. Following the prior literature
(e.g., Piotroski and Roulstone, 2008; Huddart and Ke, 2007; Jagolinzer et al., 2011), we
proxy for executives’ insider trading profits using the average daily abnormal returns
from the Fama-French four-factor model estimated over the 180 days following each
trade. We examine the association between a firm’s CSR orientation and its executives’
subsequent insider trading profits.
Consistent with the prior literature (Aboody and Lev, 2000; Huddar and Ke, 2007;
Jagolinzer et al., 2011), we find that executives make profits from purchase transactions
2
but not from sales. We further find that, for CSR conscious firms, i.e., firms with more
CSR strengths than concerns in the prior year, executives’ trading profits from purchases
are significantly lower than for non-CSR conscious firms. The difference in trading
profits persists after we control for firms’ book-to-market ratio, size, a variety of proxies
of information asymmetry, and insider trading restrictions. Exploring various dimensions
of the aggregate CSR score, we find that environmental consciousness is a dominant
factor that constrains executives’ insider trading profits. This is consistent with
environmental initiatives receiving the most attention from regulators and the general
public (PricewaterhhouseCoopers, 2010; Adam Friedman Associates, 2012) and thus
likely contributing more to a firm’s reputational capital compared to the other dimensions
of CSR.
To reinforce our inference that CSR constrains executives’ insider trading profits,
we conduct several inter-temporal and cross-sectional tests. First, we examine whether a
firm’s adoption of new CSR initiatives is associated a subsequent decline of executives’
insider trading profits. Our analysis indicates that, after a firm turns from non-CSR
conscious to CSR conscious, its executives’ insider trading profits decrease significantly.
Second, we examine trading profits of newly appointed executives from outside
the company. These new executives do not create the firm’s CSR orientation but are
likely constrained by it. Consistent with our primary findings, these new executives of
CSR conscious firms also make lower insider trading profits than their counterparts of
non-CSR conscious firms, supporting our main inference that insider trading is
constrained by CSR.
3
Third, we investigate whether the constraining effects of CSR on insider trading
profits are more pronounced absent effective alternative constraining mechanisms. Prior
research suggests that strong corporate governance limits insider trading profits (Ravina
and Sapienza, 2010; Jagolinzer et al., 2011). We thus expect the constraining effects of
CSR to be more evident in firms with weak governance. Consistent with this, our analysis
shows that executives of CSR conscious firms make lower insider trading profits than
executives of non-CSR conscious firms only in the subsample of weakly governed firms.
We perform a number of robustness tests. First, a firm’s CSR orientation could be
endogenously determined by the characteristics of the firm. To address this issue, we use
the propensity score matching technique and match each CSR conscious firm-year with a
non-CSR conscious firm-year with the closest propensity score. Our matching model
accounts for all explanatory variables in the trading profit regression and other potential
determinants of CSR, such as free cash flows and institutional ownership. We continue to
find that executives of CSR conscious firms make significantly lower profits from insider
trading than executives of matched firms.
Second, we include additional controls for potentially omitted correlated variables.
We control for media coverage, measured by the average daily number of news articles
covering each firm in the year of the trade, as mass media can be a source of information
that reduces insider trading profits (Frankel and Li, 2004) and a source of pressure that
promotes CSR practices (Zyglidopoulos et al., 2012). We also control for top executives’
total compensation since prior research suggests that insider trading can be a form of
compensation (e.g., Manne, 1966, 2011). Our inferences are robust to including the
additional controls.
4
Third, we expect the constraining effects of CSR to be less prominent on lower
level managers than on executives, as lower level managers’ informed trades are likely
less damaging to a firm’s reputation given their lower visibility. We find that, while CSR
constrains executives’ trading profits, it does not constrain the trading profits of lower
level managers.
Finally, we examine whether a firm’s CSR orientation affects the likelihood of
executives engaging in insider trading prior to future corporate news. Consistent with
insider trades being driven by superior information, we find that, for non-CSR conscious
firms, executives are more likely to buy prior to good news and/or sell prior to bad news.
In contrast, there is no such evidence for executives of CSR conscious firms, suggesting
that these executives are constrained by the CSR orientation of their firms and therefore
are less likely to trade on insider information.
Our paper contributes to the literature in at least two ways. First, we add to the
insider trading literature by examining the role of reputational concerns on insider trading.
While a number of studies have investigated how regulations and firm-specific policies
constrain insider trading, there lacks empirical support for the often conjectured
constraining effects of reputational costs. Using CSR orientation as a proxy for
reputational costs, we provide evidence on the constraining role of reputational concerns.
Second, we contribute to the CSR literature by suggesting a new channel through
which CSR initiatives might affect managerial behavior. We find that a firm’s CSR
orientation could act as an economic constraint on potentially opportunistic managerial
decisions, such as informed insider trading, via its connection with the firm’s reputational
capital.
5
Some studies suggest that executives of CSR conscious firms are ethical (e.g.,
Kim et al., 2012). If so, they will likely restrain from trading on private information.
However, we believe our results are better explained by the economic constraint
perspective of CSR than ethics. Executives of CSR conscious firms, just like executives
of non-CSR conscious firms, make economically and statistically significant profits from
insider trading, inconsistent with these executives being ethical.
The remainder of this paper is organized as follows: Section 2 discusses related
studies, hypothesis, and research design. Section 3 describes the sample and main
analyses. Section 4 reports additional tests and Section 5 concludes.
2. Related Studies, Hypothesis Development and Research Design
2.1. Related studies and hypothesis development
Corporate insiders have access to a continuum of material non-public information
about their own firms. Prior studies suggest that insiders trade on (e.g., Frankel and Li,
2004; Piotroski and Roulstone, 2005) and profit from (e.g., Aboody and Lev, 2000;
Skaife et al., 2012) their superior knowledge about the firms’ prospects. 1 Rozeff and
Zaman (1988) point out that insider trading profits persist even after taking into account
transaction costs.
While insiders can extract profits from informed trading, they also face a number
of constraints. Regulators impose penalties on insider trades based material non-public
1
Under the semi-strong form of market efficiency, only trades based on private information can earn
profits. Therefore, these persistent trading profits suggest that insiders trade on their private information.
6
information.2 However, Seyhun (1992) shows that enactment of tighter regulations does
not seem to reduce insider trading profits. Piotroski and Roulstone (2005), on the other
hand, find evidence that legal costs do constrain insider trading in the sense that insiders
attempt to reduce the risk of investigation by avoiding trades immediately prior to major
news events. Firms also voluntarily adopt policies to restrict insider trades. Bettis et al.
(2000) document that the specification of blackout periods is effective in restricting
insider trades. Jagolinzer et al. (2011) further show that a more effective approach is to
require approval from the general counsel before insider transactions.
A relatively unexplored constraint of insider trading is a firm’s reputational
concerns. Profitable insider trading is associated with a general perception that insiders
exploit uninformed shareholders for personal financial gains.3 Schotland (1967) claims
that, since such gains are “unfair,” unacceptable wrong is inflicted by insiders’ informed
trading. This perception of unfairness raises significant negative sentiment against insider
trading. The media widely embrace the view that profit from insider trading is reward
without risk and wealth generated with injury done to others. 4 Consequently, when
insider trading is detected and revealed, firms often experience substantial negative
publicity that results in reputational losses (Bettis et al., 2000). For example, in the case
of Diamond v. Oreamuno, the court noted that informed trading can “cast a cloud on the
2
The Securities Exchange Act of 1934 requires insiders to forfeit (to their company) the profit realized
from round-trip transactions (e.g., a buy followed by a sale) made within six months of each other. The
Insider Trading Sanctions Act of 1984 increases the maximum civil penalty for illegal insider trading to
three times the amount of profit gained or losses avoided, and imposed a maximum criminal penalty of
$100,000 and a maximum jail sentence of 5 years. The Securities Fraud Enforcement Act of 1988 further
increases the maximum criminal penalties to $1,000,000 and the maximum jail sentence to 10 years.
3
Our paper is silent on whether insider trading enhances or harms economic efficiency. The literature is
inconclusive on this topic (e.g., Manne 1996; Ausubel, 1990; Fishman and Hagerty, 1992).
4
See, for example, the article by Pulitzer-Prize-winner George Will, “Keep Your Eye on Guiliani,” on
Newsweek, March 2, 1987.
7
corporation’s name, injure stockholder relations and undermine public regard for the
corporation’s securities.”
CSR, on the other hand, is widely considered a strategic investment in reputation
building and maintenance (Fombrun and Shanley, 1990; McWilliams et al., 2006;
Linthicum et al., 2010). McWilliams and Siegel (2001) present a theory of the firm
perspective of CSR, stating that firms accrue reputation capital through their
commitments to the social good. Adam Friedman Associates (2012) survey CSR
executives at Fortune 1000 firms and identify reputation as the primary motivation
behind CSR initiatives. Consistent with CSR being effective at enhancing reputation, the
literature shows that CSR conscious firms experience increased brand value, more
customer awareness, and greater investor appreciation (Brown and Dacin, 1997; Servaes
and Tamayo, 2012; Rosen et al., 1991).
With more reputation capital at stake, CSR conscious firms face higher potential
reputational losses from informed trading. Such expected costs, ex ante, will constrain
executives from insider trading. The constraining effects could come through multiple
channels. For example, CSR conscious firms likely entertain a corporate culture that
values reputation. This culture would discourage individual behavior that can damage
firm reputation, such as informed insider trading.5 Furthermore, managerial wealth is tied
to the value of the firm directly through the ownership of stock or stock options and
indirectly through salaries and bonuses based on various financial and nonfinancial
performance measures. Thus, reputational losses of the firm can translate into personal
5
Organizational research suggests that corporate culture is a social control mechanism that influences
individual behavior by encouraging conforming activities and discourages nonconforming activities
(O’Reilly and Chatman, 1996; Sunstein 1996; Sørensen, 2002).
8
costs of insider trading and thereby provide disincentives for informed trading. 6 In
addition, CSR conscious firms might adopt explicit corporate policies to constrain insider
trading and protect their reputation.7
In summary, we expect that executives of CSR conscious firms are more
constrained from insider trading due to higher reputational costs and therefore would
make lower trading profits than executives of non-CSR conscious firms. We thus form
the following hypothesis:
H1: Executives of CSR conscious firms make lower insider trading profits than
executives of non-CSR conscious firms.
2.2. Research Design
2.2.1. Measure of CSR orientation
We measure firms’ CSR orientations with the CSR ratings issued by MSCI,
which uses a combination of surveys, financial statements, and articles in the popular
press and academic journals, as well as government reports, to assess firms’ CSR
performance with approximately 100 indicators. It examines strengths and concerns in
each of following seven categories: environment, community, human rights, employee
relations, diversity, customers, and governance. Additional concerns are noted for
6
Informed insider trading may also harm executives’ personal reputation. If a firm’s CSR activities
increase the personal reputation of executives who make CSR decisions, the personal reputation costs of
their insider trading would increase, thereby constraining their trading. While this may be possible and is
consistent with reputation constraining insider trading, we are not aware of any literature support regarding
the connection between a firm’s CSR orientation and its executives’ personal reputation.
7
We do not find our measure of CSR consciousness and our proxy of the existence of firm-level black-out
period restrictions on insider trading to be positively correlated. While formal insider trading policies might
be a channel through which CSR conscious firms regulate insider trading, it is possible that the implicit
constraining effects of corporate culture and compensation schemes reduce the benefits and therefore the
likelihood of adopting costly explicit policies.
9
activities in the following controversial industries: alcohol, gambling, tobacco, firearms,
military, and nuclear power.
MSCI data have been used extensively in various disciplines of business
academic research to measure the construct of CSR performance (e.g., Turban and
Greening, 1997; Berman et al., 1999; Johnson and Greening, 1999; Hong and
Kostovetsky, 2012; Kim et al., 2012; Servaes and Tamayo, 2012). Chatterji et al. (2009)
commend MSCI’s social ratings as one of the most influential and the most widely
accepted CSR measures used by academics. Szwajkowski and Figlewicz (1999) evaluate
the validity and reliability of the MSCI database, and conclude that their ratings have
substantial and discernible validity with especially strong internal discriminant validity.
Waddock (2003) further assert that the MSCI data are “the de facto research standard” for
measuring CSR in scholarly research.
Similar to prior studies (e.g., Kim et al., 2012), we construct a CSR score,
measured as the total number of strengths minus the total number of concerns in all
MSCI’s rating categories excluding the human rights dimension and the corporate
governance dimension.8 We identify a CSR conscious firm as a firm with a positive CSR
score in the prior year.9
2.2.2. Measure of insider trading profits
8
Our results are robust to including the human rights dimension and the corporate governance dimension,
excluding the concern indicator variables for involvement in controversial industries, and excluding
observations with a CSR score of zero.
9
Our inferences are unchanged if we also classify firms with a CSR score of zero as CSR conscious firms,
or if we use the continuous CSR score to measure CSR consciousness.
10
Following the extant literature (e.g., Frankel and Li, 2004; Huddart and Ke, 2007;
Jagolinzer et al., 2011), we measure executives’ insider trading profits as the average
daily abnormal return over the six months following each trade.10 The trading profits are
estimated using the following transaction-specific regression of daily returns on four
common factors:
Ri – Rf = α + β1 (Rmkt – Rf) + β2 SMB + β3 HML+ β4 UMD + ε
Ri is the daily return of firm i’s equity, Rf is the daily risk-free interest rate, and Rmkt is the
CRSP value-weighted market return. SMB, HML, and UMD are the size, book-to-market,
and momentum factors. Trading profits are equal to α (-α) for purchases (sales). We
examine differences in executive’s insider trading profits between CSR conscious firms
and non-CSR conscious firms. If CSR constrains insider trading, we would find that
executives of CSR conscious firms make lower trading profits than executives of nonCSR conscious firms.
3. Main analyses
3.1. Sample and descriptive statistics
We gather the CSR ratings data from MSCI, a database that covers about 650
largest U.S. companies from 1991 to 2000, about 1,100 largest U.S. companies from
2001 to 2002, and about 3,000 largest U.S. companies since 2003.11 We obtain insider
trading information from the Thomson Financial Insider Filing Data (TFN), which
contains insider trading activity reported on SEC Forms 3, 4, and 5. We focus on trades
10
Defining trading profits alternatively as the dollar amount of profits, i.e., abnormal returns multiplied by
the value of the trades, yields qualitatively similar results.
11
Our results are robust to using only the sample period 2003 and beyond.
11
of common shares by top executives including CEO, CFO, CIO, COO, CTO, and
Presidents. Following the literature (e.g., Frankel and Li 2004), we include only openmarket transactions and require a minimum transaction price of $2 a share and 100 shares
per transaction. We delete transactions with more shares than the CRSP daily volume and
prices outside the bid-ask price range. After merging with the Compustat database to
obtain control variables, our final sample includes 56,966 insider trading transactions
corporate executives made from 1992 to 2011.
Table 1 reports descriptive statistics. The mean CSR score is -0.1741 and the
median is 0. About 28% of our sample have a positive CSR score and are therefore
classified as CSR conscious firms. The summary statistics for control variables used in
the main analysis are also reported. Variable definitions are summarized in the appendix.
Not surprisingly, our sample firms are large, due to the composition of the MSCI
database.
3.2. Univariate and regression analyses
Panel A of Table 2 reports the univariate analysis of executives’ insider trading
profits in CSR conscious firms vs. non-CSR conscious firms. We present the trading
profits following each trade across various windows, i.e. 180 days, 120 days, and 90
days. Since our results are similar using different windows, we focus on the 180-day
window in our discussions. Following prior studies (Frankel and Li, 2004; Brochet, 2010;
Jagolinzer et al., 2011), we report insider purchases and sales separately. The mean daily
trading profits from executive purchases is 0.0402% for CSR conscious firms. In
contrast, for non-CSR conscious firms, the mean daily trading profits from executive
12
purchases is 0.0568%, over 40 percent more than for CSR conscious firms. The
difference is significant, both statistically and economically. The comparison of the
median profits from executive purchases between CSR conscious firms and non-CSR
conscious firms exhibits the same pattern. These results suggest that executives of CSR
conscious firms make lower insider trading profits than executives of non-CSR conscious
firms.
Consistent with the prior literature (Aboody and Lev, 2000; Huddart and Ke,
2007; Jagolinzer et al., 2011), we find that insiders do not profit from sale transactions.
The average trading profits from their sales is negative for both CSR conscious firms and
non-CSR conscious firms (-0.0150% and -0.0121%, respectively). 12 This is consistent
with insider sales being driven by multiple factors, some unrelated to information. For
example, executives may sell shares due to the need for diversification or portfolio
rebalancing following option grants (Ofek and Yermack, 2000). In addition, insider sales
are more likely to trigger litigation if followed by a plunge in stock price, a potential
deterrent for insiders to profit from selling on private information (Cheng and Lo, 2006;
Chen et al., 2012). As insider trading profits are more likely to create an appearance of
impropriety, in the rest of the paper, we focus on purchases only, similar to Ravina and
Sapienza (2010).
Panel B of Table 2 reports the insider trading profit regression results based on the
following model:
Trading Profitt = α + β1 CSRt-1 + β2 BTMt-1 + β3 LogMVt-1 + β4 R&Dt-1 + β5 Losst-1 + β6
Volatilityt-1 + β7 LogAnalystt-1 + β8 Turnovert-1 + β9 Restrictt-1 + εt
(1)
12
The difference is -0.0029%, statistically significant at the 10% level, which is consistent with our
hypothesis. However, we acknowledge that this difference is likely not economically significant.
13
The variable Trading Profitt is the estimated average daily trading profits over 180 days
following each trade. The CSRt-1 indicator variable is equal to one for CSR conscious
firms, i.e., firms with a positive aggregate CSR score in the year prior to the trade.
Following Lakonishok and Lee (2001), we control for firm risk with two proxies,
the book-to-market ratio (BTMt-1) and firm size (LogMVt-1). We also control for
information asymmetry following prior research. Aboody and Lev (2000) document
higher insider trading profits in firms with R&D activities. We define R&Dt-1 as a dummy
variable equal to one if a firm has positive R&D expenses. Following Huddart and Ke
(2007) and Brochet (2010), we also include a loss dummy (Losst-1). As in Ravina and
Sapienza (2010), Volatilityt-1 is computed as the variance of daily stock returns over the
interval (-380, -20) before each trade. We also follow Frankel and Li (2004) to include
analyst following (LogAnalystt-1). We add share turnover (Turnovert-1) to control for
differences in the intensity of investor interest between CSR conscious and non-CSR
conscious firms. Bettis et al. (2000) find that insider trading restrictions with blackout
periods reduce insider trading profits. We follow Roulstone (2003) and Brochet (2010)
and control for Restrictt-1, a dummy variable set to one if 75% or more of trades in a
fiscal year occur in a 30-day window following an earnings announcement.13 Following
Ravina and Sapienza (2010) and Cao et al. (2011), we cluster standard errors by
executive.14
13
Bettis et al. (2000) collect data on blackout periods from a survey. Roulstone (2003) and Brochet (2010)
construct a proxy for blackout periods based on publicly available data on insiders’ trading patterns and we
follow their approach to control for blackout periods.
14
Our results are robust to clustering standard errors by executive-year or by firm, and controlling for
industry and year fixed effects.
14
Panel B reports the results of model (1) for purchases. Consistent with the
univariate analysis, our results are similar across different trading windows. Therefore,
we focus on the 180-day window in our discussions here and in subsequent analyses
following prior studies (Seyhun, 1998; Huddart and Ke, 2007; Brochet, 2010; Jagolinzer
et al., 2011). We find a negative and significant coefficient on CSRt-1 (-0.0181,
p=0.0074), suggesting that executives of CSR conscious firms make significantly lower
profits in insider purchases than executives of non-CSR conscious firms, consistent with
our hypothesis.
In an untabulated analysis, we also estimate model (1) for sale transactions across
different trading windows. The coefficient on CSRt-1 is insignificant at conventional
levels. Thus, there is no evidence that trading profits (losses) from insider sales differ
between CSR conscious and non-CSR conscious firms.
3.3. Dimensions of CSR
Our CSR score is a composite index summarizing various dimensions of social
responsibility. Next, we explore which aspect drives the relation between a firm’s CSR
orientation and executives’ insider trading profits. We follow the prior literature (Turban
and Greening, 1997; Kim et al., 2012) and examine each of the following five dimensions
of CSR: environment, community, employee relations, diversity, and product.
15
Environmental issues tend to attract more attention from regulators and the general public.
Adam Friedman Associates (2012) suggests that environmental issues are a top focus for
CSR executives, dominating all the other dimensions of CSR. A similar view is
15
We do not examine the controversial industries as a separate dimension because they are noted for
concerns only.
15
expressed in another survey by PricewaterhhouseCoopers (2010), where over 90% of
surveyed companies had a dedicated discussion about the environment in their CSR
reports. Since investing in environmental projects is more likely to effectively accrue
reputational capital for the firm, environmental consciousness is more likely to constrain
executives’ insider trading profits than the other dimensions.
Similar to the definition of CSRt-1, we construct an indicator variable for each of
the following five dimensions, CSR_Environmentt-1, CSR_Communityt-1, CSR_Employee
Relationst-1, CSR_Diversityt-1, and CSR_Productt-1. These indicator variables are equal to
one if the CSR score in the corresponding dimension is positive, i.e., the total number of
strengths is greater than the total number of concerns in that dimension. We examine the
relation between these CSR dimensions and executives’ trading profits using the
following regression model:
Trading Profitt = α + β1 CSR_Environmentt-1 + β2 CSR_Communityt-1 + β3
CSR_Employee Relationst-1 + β4 CSR_Diversityt-1 + β5 CSR_Productt-1 + β6 BTMt-1 + β7
LogMVt-1 + β8 R&Dt-1 + β9 Losst-1 + β10 Volatilityt-1 + β11 LogAnalystt-1 + β12 Turnovert-1
+ β13 Restrictt-1 + εt
(2)
We present the regression results in Table 3. The coefficient on CSR_Environmentt-1 is
negative and significant (-0.0239, p=0.0315) whereas coefficients on all the other CSR
dimensions are insignificant at the 10% level. Our results suggest that the environment
dimension of CSR is a dominant constraining force limiting executives’ insider trading
profits.
3.4. Effect of new CSR initiatives
To reinforce our inference that CSR constrains insider trading, we complement
the main analyses by examining whether a firm’s adoption of new CSR policies affects
16
executives’ subsequent insider trading profits. Since we do not have data on CSR
initiations, we identify likely adopters of new CSR policies based on the MSCI data, i.e.,
we select a sample of firms rising from non-CSR conscious (CSR = 0) to CSR conscious
(CSR = 1). For this subsample, we estimate the following model using executive trades
before and after their rise to CSR consciousness.
Trading Profitt = α + β1 Post + β2 BTMt-1 + β3 LogMVt-1 + β4 R&Dt-1 + β5 Losst-1 + β6
Volatilityt-1 + β7 LogAnalystt-1 + β8 Turnovert-1 + β9 Restrictt-1 + εt
(3)
The indicator variable Post is equal to one for executive trades during the first year after
the firm turns CSR conscious, and zero for their trades during the most recent year before
that.16 We expect the coefficient on Post to be negative if executives’ insider trading
profits decrease after the adoption of new CSR policies.
Table 4 summarizes the estimation results of model (3). The coefficient on Post is
negative and significant (-0.0553, p=0.0067), suggesting that executives’ insider trading
profits decrease as a firm turns CSR conscious. This finding reinforces our primary
inferences, suggesting that insider trading is more constrained with enhanced CSR
consciousness.17
3.5. New executives from outside the firm
An alternative explanation for our finding of a negative relation between CSR and
executives’ insider trading profits is that executives who are less likely to exploit their
16
Executives do not trade in all years, so we examine firm-years with trades to identify rises in CSR
consciousness. If we identify the rises by comparing adjacent firm-years only (i.e., we require these
adjacent years to have executive trades), our sample size is reduced by half but our results are robust, i.e.,
the coefficient on Post is still negative and significant.
17
Using an alternative specification of a firm-year level regression that regresses changes in yearly average
executives’ insider trading profits on an indicator variable for rising from non-CSR conscious to CSR
conscious and changes in all control variables in model (1) yields the same inference.
17
private information for trading profits are also more likely to take on more CSR. To
explore this alternative explanation, we conduct an additional analysis focusing
exclusively on newly appointed executives from the outside. These new executives do
not create the firm’s CSR orientation. Thus, under the alternative explanation, we do not
expect these new, outside executives’ trading profits to be systematically correlated with
the existing CSR orientation of their new employer. However, since they are constrained
by CSR and the reputational concerns at the new company, our hypothesis should extend
to these new executives and predict a negative association between their trading profits
and the CSR consciousness of the new employer.
We identify newly appointed executives from the outside using two alternative
approaches. The first approach relies on the TFN insider filing data. We examine all
transactions, including option exercising, of executives and lower-level officers of all
firms to track the employment history of each person. If an executive was affiliated with
another organization, as an executive or as a lower-level officer, and the gap between
his/her first trade as an executive at the current company and last trade at the other
organization is within five years, we identify the executive as recently hired from the
outside. 18 The second approach relies on the Execucomp data. Execucomp provides
information on the year in which an officer joins a company for about 30 percent of
executive/company combinations. We then manually merge this subsample with the
insider trading data by executive name. Under either approach, we estimate model (1)
with the purchase transactions made by these new, outside executives only.
18
Requiring the gap between trades to be within three years, two years, or one year does not change our
inferences.
18
The estimation results are reported in Table 5. Column (1) shows the results for
new executives identified using the TFN data. The coefficient on CSRt-1 is negative and
significant (-0.0508, p=0.0176), suggesting that new executives of CSR conscious firms
make lower profits from insider trading than their counterparts of non-CSR conscious
firms. Column (2) reports the results for new executives identified using Execucomp
data. Consistent with the first column, the coefficient on CSRt-1 is also significantly
negative (-0.0580, p=0.0532). These results provide further support for our main
inference that CSR acts as a constraint of insider trading.19
3.6. Corporate governance and the constraining effects of CSR
The constraining effect of reputational concerns on insider trading is likely more
pronounced in the absence of effective alternative constraining mechanisms. Ravina and
Sapienza (2010) suggest that, when corporate governance is weak, executives have more
opportunities to expropriate shareholders and to profit from informed trading. In this
case, we expect the reputational capital captured by CSR orientation to exhibit a stronger
constraining effect, i.e., the difference in insider trading profits between CSR conscious
and non-CSR conscious firms is more evident under weak corporate governance.
We partition our sample into strong- vs. weak-governance firms based on the
median of the governance index proposed by Gompers et al. (2003).20 Among the 2,649
19
A potential selection issue in the appointment of new executives is the tendency of CSR conscious firms
to hire executives from other CSR conscious firms. Our inferences are unchanged if we drop new
executives who used to work for CSR conscious firms.
20
Since G-index data is not available after 2006, we apply the values of 2006 to future years (i.e., 20072011). Our results are qualitatively the same if we drop years after 2006 from our sample. We follow
Ravina and Sapienza (2010) to use Gompers et al.’s (2003) governance index but not use MSCI’s corporate
governance data as our proxy for corporate governance because MSCI measures the strengths and
weaknesses of governance based on the quality of a firm’s CSR/sustainability reporting, a firm’s attitude
19
observations in the weak-governance sample, 1,020 observations are from CSR conscious
firms; 847 of the 2,465 observations in the strong-governance sample are from CSR
conscious firms. We estimate model (1) for firms with strong and weak corporate
governance separately and report the regression results in Table 6. We find a negative
and significant coefficient on CSRt-1 for firms with weak corporate governance (-0.0310,
p=0.0031), suggesting that executives of CSR conscious firms make lower insider trading
profits than executives of non-CSR conscious firms when governance is weak. However,
the coefficient on CSRt-1 is insignificant (0.0130, p=0.3095) for firms with strong
corporate governance. These results are consistent with our expectation that the
constraining effects of a firm’s CSR orientation on executives’ insider trading profits is
more pronounced under weak corporate governance.
Gompers et al.’s (2003) governance index captures overall governance based on
corporate charter provisions that may not be specifically designed for monitoring insider
trading. Thus, in addition to this general measure, we also explore the impact of insidertrading-specific governance mechanisms (i.e., insider trading policies) on the
constraining effects of CSR on insider trading profits. We search firms’ websites as of
November 2012 to collect data on whether they disclose a stand-alone insider trading
policy or caution against insider trading in the code of conduct. We focus on a subsample
of insider trades occurring in 2011, the most recent year in our sample, assuming that
firms maintain consistent insider trading policies and disclosures between 2011 and
towards public policies on environment, communities, employees, or consumers, the severity of
controversies related to a firm’s executive compensation and governance practices, and the severity of
controversies related to a firm’s business ethics practices (MSCI ESG STATS User Guide & ESG Ratings
Definition, June 2011). These dimensions are very different from the traditional measures of corporate
governance that researchers use in academic research.
20
2012.21 Such disclosures highlight their concerns over insider trading and therefore we
consider it an indicator of strong insider-trading-specific governance. About 61% (304
out of 498) of our sample make these disclosures. We find a significant difference in
executives’ trading profits between CSR conscious and non-CSR conscious firms only in
the subsample where firms do not emphasize insider trading restrictions on their
websites, i.e., firms likely with weak insider-trading-specific governance. Since these
inferences are the same as those from Table 6 on overall governance, the results are
untabulated.
4. Additional analyses
4.1. Endogeneity of CSR and propensity score matching
A firm’s CSR orientation can be endogenously determined by the characteristics
of the firm. To the extent that certain firm characteristics drive a firm’s CSR orientation
and are omitted from our prior analyses, the relation between CSR and executives’
insider trading profits could be spurious. We follow the prior literature (e.g., Armstrong
et al., 2010; Jagolinzer et al., 2011) and adopt the propensity score matching technique to
mitigate this concern. To generate the propensity score, we construct a first-stage logistic
regression model for CSRt-1 at the firm-year level as follows:
Prob(CSRt-1=1) = logit(α + β1 BTMt-1 + β2 LogMVt-1 + β3 R&Dt-1 + β4 Losst-1 + β5
Volatilityt-1 + β6 LogAnalystt-1 + β7 Turnovert-1 + β8 Restrictt-1 + β9 Free Cash Flowt-1 +
(4)
β10 Institutional Ownershipt-1 + β11 Firm Aget-1 + β12 Market Sharet-1 + εt-1)
21
We cannot follow Bettis et al. (2000) or Jagolinzer et al. (2011) to construct their insider-trading-specific
governance variables due to data constraints. Bettis et al.’s (2000) analysis is based on a survey of
companies on insider trading policies. Jagolinzer et al. (2011) conduct a comprehensive web search for
detailed insider trading policies and find only 437 policies out of the universe of public firms. In our
random sample, only 14 firms disclose detailed insider trading policies.
21
We include all the control variables in model (1). In addition, we control for Free Cash
Flowt-1, which measures the difference between cash flow from operations and cash flow
used in investing activities. We expect that firms with more free cash flow have more
resources to invest in CSR. Since institutional investors care about CSR (Johnson and
Greens, 1999; Kim et al., 2012), we also control for Institutional Ownershipt-1, measured
as the percentage of institutional holdings. Dhaliwal et al. (2012) suggest that older firms
are more likely to invest in CSR, so we control for Firm Aget-1. We also follow Dhaliwal
et al. (2012) and use Market Sharet-1, measured as a firm’s fraction of sales in its industry,
to capture the firm’s visibility and public pressure for CSR performance.
Panel A of Table 7 tabulates the first stage logistic regression results. The
regression is estimated with 4,273 firm-year observations in our full sample, 1,240 of
which are classified as CSR conscious firms. Consistent with our expectations, we find
that larger firms, and firms with more R&D investments, higher investor interests, and
higher institutional ownership are more likely to be CSR conscious firms.
Next, we calculate the propensity scores using predicted probabilities from the
logistic regression and match each CSR conscious firm-year to a control firm-year with
the closest propensity score, provided that the propensity score of the closest match is
within a distance of 0.1. This procedure results in 1,109 matched pairs (i.e., about 90% of
the CSR-conscious firm-year observations are matched). The mean (median) propensity
score of the CSR conscious sample is 0.3706 (0.3662), while that of the matched control
sample is 0.3542 (0.3540). As in Armstrong et al. (2010), we perform a parametric t-test
of the difference in means between the CSR conscious sample and the matched sample
and a non-parametric Kolmogorov-Smirnov test of the difference between the two
22
distributions. Neither test shows the difference to be statistically different from zero at
conventional levels.
We then compare executives’ insider trading profits in CSR conscious firms vs.
the propensity score matched control firms.22 The mean trading profits for executives of
CSR conscious firms is significantly lower than the mean trading profits for executives of
the control firms (0.0390%
versus 0.0561%, p<1%). 23 Comparison of the medians
shows the same pattern. These results are similar to our main results reported in Table 2.
4.2. Impact of media coverage
Zyglidopoulos et al. (2012) argue that media attention could potentially pressure
firms to be more socially responsible. Meanwhile, Frankel and Li (2004) predict that
news coverage, as a source of information, helps decrease insider trading profits. Thus,
the negative association between executives’ trading profits and CSRt-1 may be driven by
CSR conscious firms being covered more extensively by the media.
To mitigate this concern, we collect from Factiva the number of news articles
covering each firm during the fiscal year of the trades. We include all sources available
on Factiva, both voluntary disclosures and press coverage. A simple correlation analysis
indicates a positive and significant correlation between CSRt-1 and the average daily
number of news articles, Mediat, (0.1474, p<0.0001). The correlation between trading
profits and Mediat is negative but insignificant (-0.0041, p=0.6898).
22
Following Jagolinzer et al. (2011), we perform the first-stage propensity score matching procedure at the
firm-year level, but conduct this insider trading test at the transaction level.
23
The propensity score matching procedure creates a pseudo “random” sample such that univariate
differences in means between the treatment and control groups should be sufficient to estimate the
treatment effects (Dehejia and Wahba, 2002; Dehejia, 2005). Nonetheless, our inference remains
unchanged if we rerun model (1), a multivariate analysis, for the pooled sample of CSR conscious firms
and the propensity score matched control firms.
23
We estimate model (1) again, including Mediat as a control variable. The results
are reported in the first column of Table 8. The coefficient on Mediat is insignificant
(0.0047, p=0.2435). 24 Importantly, it does not explain away the negative association
between executives’ trading profits and CSRt-1. The coefficient on CSRt-1 remains
negative and significant (-0.0152, p=0.0319).
4.3. Insider trading as a form of compensation
Manne (1996, 2011) argues that insider trading can serve as a compensation
device. Consistent with this argument, Roulstone (2003) finds firms that restrict insider
trading pay a premium in total compensation relative to firms not restricting insider
trading. This argument suggests that executive compensation can be an omitted correlated
variable if CSR conscious firms are more likely than others to pay higher executive
compensation.
To address this issue, we include the level of executive total compensation in
model (1). We obtain executive compensation data from Execucomp. Since matching
TFN and Execucomp at the person level is a manual operation, we take the natural
logarithm of median total compensation of the top five most highly paid executives as a
firm-year level measure of compensation.25
The estimation results are reported in the second column of Table 8. We find a
positive coefficient on Compensationt (0.0152, p=0.0355), contrary to the expectation of
24
Frankel and Li (2004) find a positive correlation between media coverage and trading profits, although
they predict a negative association.
25
Alternatively we use the logarithm of the average total compensation and the dollar amount of average or
median compensation as robustness checks. While the coefficient on the compensation variables differs
across different specifications, the coefficient on our variable of interest, CSRt-1, is consistently negative
and significant at better than 5% level.
24
Manne (1996, 2011). Importantly, the coefficient on CSRt-1 remains negative and
significant (-0.0142, p=0.0576), consistent with our prior results.
4.4. CSR and lower-level managers
Given their lower visibility than executives, informed trading by lower-level
managers is likely less damaging to a firm’s reputation. Therefore, the constraining
effects of reputational concerns on insider trading are likely less pronounced for lowerlevel managers. To compare with our previous results for executives, we re-estimate
model (1) for trades made by lower-level managers.
Table 9 reports the estimation results. The coefficient on CSRt-1 is not
significantly different from zero (0.0056, p=0.3382), whereas the estimation results of
model (1) for trades made by executives (Table 2 Panel B) reveal a negative and
significant coefficient on CSRt-1 (-0.0181, p=0.0074). This contrast is consistent with our
expectation that insider trading less damaging to a firm’s reputation is less constrained by
CSR.
4.5. CSR and the likelihood of news-based insider trading
In addition to trading profits, we also examine the likelihood of executives trading
on private information as an alternative measure of insider trading activity. We expect
that CSR also lowers the likelihood of executives engaging in informed purchases. We
adopt the following model in Piotroski and Roulstone (2008), which focuses on trading
25
ahead of changes in earnings and returns, and estimate it separately for CSR conscious
firms and non-CSR conscious firms:26
Prob(Purchaset=1) = logit(α + β1 Earnt+1+ β2 MARett+1 + β3 BTMt + β4 LogMVt + β5
(5)
MARett + β6 R&Dt + εt)
We define an indicator variable Purchaset, equal to one if any executive purchased shares
in an open-market transaction during year t and total shares purchased by executives are
greater than or equal to total shares sold by executives. Earnt+1 is one of the two proxies
for future news, measured as the change in earnings from year t to year t+1. MARett+1 is a
second proxy for future news, measured as the twelve-month buy-and-hold marketadjusted return over year t+1. We control for insiders’ contrarian trading tendency with
the twelve-month buy-and-hold market-adjusted return over year t (MARett). We also
control for the book-to-market ratio (BTMt), firm size (LogMVt), and R&D activities
(R&Dt).27
We report the results of regression model (5) separately for CSR conscious firms
and non-CSR conscious firms in Table 10. For non-CSR conscious firms, we find a
positive coefficient on both proxies for future news, i.e., change in earnings (0.6606,
p=0.0399) and future returns (0.1163, p=0.0901), suggesting that executives are more
likely to buy prior to good news. In contrast, neither coefficient is statistically significant
26
Examining the trading patterns before future news also mitigate a potential concern of measuring insider
trading profits with post-trade abnormal returns (Ke et al, 2003; Piotroski and Roulstone, 2005) since one
may argue that the post-trade price movements might have been caused by the trades themselves and thus
post-trade abnormal returns may not indicate insiders profiting from superior information (e.g., Ravina and
Sapienza, 2010).
27
We also include variables capturing whether executives received grants of restricted stock or options
during year t and whether executives exercised options during year t as additional control variables.
Untabulated results show that adding these controls reduces our sample size by more than 50%, but our
inferences remain unchanged.
26
for CSR conscious firms (0.1308, p=0.8174; 0.0681, p=0.5221), suggesting that
executives of CSR conscious firms do not trade on these two types of future news. 28
5. Conclusion
Prior literature on insider trading has focused on federal level and firm-level
regulations as constraints. We examine whether reputational capital created by a firm’s
CSR activities also constrains executives’ insider trading behavior. Using MSCI’s CSR
ratings data, we find that executives of CSR conscious firms make significantly lower
profits from their purchases than executives of non-CSR conscious firms, suggesting that
CSR indeed constrains insider trading. Our inference is robust to controlling for firm risk,
information asymmetry, and insider trading restrictions. We further show that the
environmental dimension of CSR is the dominant constraint for executives’ insider
trading profits.
Complementing our main analyses, we document that the adoption of new CSR
initiatives (i.e., firms turning from non-CSR conscious to CSR conscious) is associated
with a subsequent decline in executives’ insider trading profits. Further, the negative
relation between CSR and insider trading profits also exists for newly appointed
executives from the outside, who do not initiate the firm’s CSR orientation but are likely
constrained by it. We also show that the constraining effects of CSR on executive insider
trading profits are concentrated in weakly governed firms.
28
We also follow Piotroski and Roulstone (2005) and examine whether the purchase ratio (number of
shares purchased/sum of number of shares purchased and number of shares sold) is associated with future
news contained in change in earnings and market returns. Results (not reported) are also consistent with
executives of CSR conscious firms being more constrained from trading on future news.
27
We also conduct a number of robustness tests. We find that executives of CSR
conscious firms make lower insider trading profits compared to executives of propensitymatched non-CSR conscious firms. Furthermore, our results are robust to controlling for
media coverage and executive compensation. We also present evidence that CSR
constrains insider trading for executives, but not for lower-level officers. Finally, we
document that executives of CSR conscious firms are less likely to purchase on
foreknowledge of future corporate news.
Collectively, our findings suggest that CSR constrains executives’ insider trading
activities. We contribute to the insider trading literature by providing empirical evidence
supporting the often conjectured constraining effects of reputational concerns on insider
trading. We also contribute to the CSR literature by suggesting an economic channel
through which CSR constrains opportunistic managerial behavior, i.e., via its connection
with a firm’s reputational capital.
28
References
Aboody, D., Lev, B., 2000. Information asymmetry, R&D, and insider gains. The Journal of
Finance 55, 2747-2766.
Adam Friedman Associates., 2012. Corporate social responsibility: Who’s responsible?
Summary available at http://www.prweb.com/releases/prweb2012/11/prweb10144917.htm.
Armstrong, C.S., Jagolinzer, A.D., Larcker, D.F., 2010. Chief executive officer equity
incentives and accounting irregularities. Journal of Accounting Research 48, 225-271.
Ausubel, L.M., 1990. Insider trading in a rational expectations economy. The American
Economic Review 80 (5), 1022–1041.
Berman, S.L., Wicks, A.C., Kotha, S., Jones, T.M., 1999. Does stakeholder orientation
matter? The relationship between stakeholder management models and firm financial
performance. Academy of Management Journal 42, 488-506.
Bettis, J.C., Coles, J., Lemmon, M., 2000. Corporate policies restricting trading by insiders.
Journal of Financial Economics 57, 191-220.
Brochet, F., 2010. Information content of insider trades before and after the Sarbanes-Oxley
Act. The Accounting Review 85, 419-446.
Brown, T.J., Dacin, P.A., 1997. The company and the product: Corporate associations and
consumer product responses. Journal of Marketing 6, 68-84.
Cao, Y., Dhaliwal, D.S., Li, Z., Yang, Y., 2011. Are all independent directors equally
informed? Evidence based on their trading returns and social networks. Working paper,
Chinese University of Hong Kong and University of Arizona.
Carroll, A.B., 1979. A three-dimensional conceptual model of corporate performance.
Academy of Management Review 4, 497-505.
Chatterji, A., Levine, D., Toffel, M., 2009. How well do social ratings actually measure
corporate social responsibility? Journal of Economics and Management Strategy 18, 125–
169.
Chen, C., Martin, X., Wang, X., 2012. Insider trading, litigation concerns, and auditor goingconcern opinions. The Accounting Review (forthcoming).
Cheng, B., Ioannou, I., Serafeim, G., 2011. Corporate social responsibility and access to
finance. Working paper, Harvard University.
Cheng, Q., Lo, K., 2006. Insider trading and voluntary disclosures. Journal of Accounting
Research 44, 815–848.
29
Dehejia, R., 2005. Practical propensity-score matching: A reply to Smith and Todd.
Journal of Econometrics 125, 355–364.
Dehejia, R., Wahba, S., 2002. Propensity score-matching methods for nonexperimental
causal studies. The Review of Economics and Statistics 84, 151–161.
Dhaliwal, D.S., Radhakrishnan, S., Tsang, A., Yang, Y.G., 2012. Nonfinancial disclosure and
analyst forecast accuracy: International evidence on corporate social responsibility
disclosure. The Accounting Review 87, 723-759.
Elliot, J., Morse, D., Richardson, G., 1984. The association between insider trading and
information announcements. The Rand Journal of Business 15, 521-536.
Fishman, M.J., Hagerty, K.M., 1992. Insider trading and the efficiency of stock prices. The
RAND Journal of Economics 23, 106–122.
Fombrun, C., Shanley, M., 1990. What’s in a name? Reputation building and corporate
strategy. Academy of Management Journal 33, 233-258.
Frankkel, R., Li, X., 2004. Characteristics of a firm’s information environment and the
information asymmetry between insiders and outsiders. Journal of Accounting and
Economics 37, 229-259.
Gompers, P., Ishii, J., Metrick, A., 2003. Corporate governance and equity prices. The
Quarterly Journal of Economics 118:107-155.
Hill, C., Jones, G., 2001. Strategic Management. Houghton Mifflin.
Hong, H., Kostovetsky, L., 2012. Red and blue investing: Values and finance. Journal of
Financial Economics, 103, 1-19.
Huddart, S.J., Ke, B., 2007. Information asymmetry and cross-sectional variation in insider
trading. Contemporary Accounting Research 24, 195-232.
Jagolinzer, A.D., Larcker, D., Taylor, D.J., 2011. Corporate governance and the information
content of insider trading. Journal of Accounting Research 49, 1249-1274.
Jeng, L.A., Metrick, A., Zeckhauser, R., 2003. Estimating the returns to insider trading: A
performance-evaluation perspective. Review of Economics and Statistics 85, 453-471.
Ke, B., Huddart, S., Petroni, K., 2003. What insiders know about future earnings and how
they use it: Evidence from insider trading. Journal of Accounting and Economics 35, 315346.
Kim, Y., Park, M.S., Wier, B., 2012. Is earnings quality associated with corporate social
responsibility? The Accounting Review 87, 761-796.
30
Kotchen, M.J., Moon, J.J., 2011. Corporate social responsibility for irresponsibility. Working
paper, Yale University and NBER.
Linthicum, C., Reitenga, A., Sanchez, J., 2010. Social responsibility and corporate
reputation: The case of the Arthur Andersen Enron audit failure. Journal of Accounting and
Public Policy 29, 160-176.
Manne, H., 1966. In defense of insider trading. Harvard Business Review, NovemberDecember, 44, 113-122.
Manne, H., 1985. Insider Trading and Property Rights in New Information. The Cato Journal
4(3), 933–943, reprinted in James A. Dorn and Henry G. Manne (eds.), Economic Liberties
and the Judiciary. Fairfax, VA: George Mason University Press, 1987, 317–327.
Manne, H., 2011. Entrepreneurship, compensation, and the corporation. Quarterly Journal of
Austrian Economics 14, 3-24.
Margolis, J.D., Elfenbein, H.A., Walsh, J.P., 2009. Does it pay to be good…And does it
matter? A meta-analysis of the relationship between corporate social and financial
performance. Working paper, Harvard University.
McWilliams, A., Siegel, D.S., 2001. Corporate social responsibility: A theory of the firm
perspective. The Academy of Management Review 26, 117-127.
McWilliams, A., Siegel, D.S., Wright, P.M., 2006. Corporate social responsibility: Strategic
implications. Journal of Management Studies 43, 1-18.
O'Reilly, C.A., Chatman, J.A., 1996. Culture as social control: Corporations, culture, and
commitment." Research in Organizational Behavior 18, 157-200.
Ofek, E., Yermack, D., 2000. Taking stock: Equity-based compensation and the evolution of
managerial ownership. The Journal of Finance 55, 1367-1384.
Petrovits, C., 2006. Corporate-sponsored foundations and earnings management. Journal of
Accounting and Economics 41, 335–361.
Piotroski, J.D., Roulstone, D.T., 2005. Do insider trades reflect both contrarian beliefs and
superior knowledge about future cash flow realizations? Journal of Accounting and
Economics 4, 409-448.
Piotroski, J.D., Roulstone, D.T., 2008. Evidence on the non-linear relation between insider
trading decisions and future earnings information. Journal of Law, Economics & Policy 39,
55-81.
PricewaterhouseCoopers., 2010. CSR trends. Available at
http://www.pwc.com/ca/en/sustainability/publications/csr-trends-2010-09.pdf.
31
Ravina, E., Sapienza, P., 2010. What do directors know? Evidence from their trading.
Review of Financial Studies 23, 962-1003.
Rosen, B., Sandler, D., Shani, D., 1991. Social Issues and Socially Responsible Investment
Behavior: A Preliminary Empirical Investigation. Journal of Consumer Affairs 25, 221–234.
Roulstone, D., 2003. The relation between insider-trading restrictions and executive
compensation. Journal of Accounting Research 41, 525-551.
Schotland, R., 1967. Unsafe as any price: A reply to Manne, Insider trading and the stock
market. Virginia Law Review 53, 1425-1478.
Servaes, H., Tamayo, A.M., 2012. The impact of corporate social responsibility on firm
value: The role of customer awareness (July 1, 2012). Management Science, Forthcoming.
Seyhun, H.N., 1992. The effectiveness of the insider-trading sanctions. Journal of Law and
Economics 35, 149-182.
Seyhun, H.N., 1998. Investment intelligence from insider trading. Cambridge, MA: MIT
Press.
Skaife, H.A., Veenman, D., Wangerin D., 2012. Internal control over financial reporting and
managerial rent extraction: Evidence from the profitability of insider trading. Journal of
Accounting and Economics (forthcoming).
Sørensen, J.B., 2002. The strength of corporate culture and the reliability of firm
performance. Administrative Science Quarterly 47, 70-91.
Sunstein, C.R., 1996. Social norms and social rules. Columbia Law Review 96, 903–968.
Szwajkowski, E., Figlewicz, R., 1999. Evaluating corporate performance: A comparison of
the Fortune reputation survey and the Socrates social ranking database. Journal of Managerial
Issues 11, 137–154.
Turban, D.B., Greening, D.W., 1997. Corporate social performance and organizational
attractiveness to prospective employees. Academy of Management Journal 40, 658–672.
Waddock, S.A., 2003. Stakeholder performance implications of corporate responsibility.
Internal Journal of Business Performance Management 5, 113–124.
Will, G., 1987. Keep Your Eye on Guiliani, Newsweek, March 2, 1987, p. 84.
Wood, D.J., 1991. Corporate social performance revisited. Academy of Management Review
16, 691-718.
Zaman, M.A., Rozeff, M.S., 1988. Market Efficiency and Insider Trading: New Evidence.
Journal of Business 61, 25-44.
32
Zyglidopoulos, S.C., Carroll, C.E., Georgiadis, A., Siegel, D.S., 2012. Does media attention
drive corporate social responsibility? Journal of Business Research 65, 1622-1627.
33
Appendix: Variable Definitions
Variables
Definition
Corporate Social Responsibility Measures
CSR scoret-1
Total number of strengths minus total number of concerns in the following
MSCI’s rating categories: Environment, Community, Employee Relations,
Diversity, Product, and involvement in the alcohol, gambling, tobacco, firearms,
military, and nuclear power controversial industry sectors, measured in year t-1.
CSRt-1
An indicator variable equal to one if the CSR score in year t-1 is positive and
zero otherwise.
Post
An indicator variable equal to one for executive trades during the first year after
the firm turns CSR conscious, and zero for their trades during the most recent
year before that.
CSR_Environmentt-1
An indicator variable equal to one if the total number of strengths is greater the
total number of concerns in the environmental dimension of CSR in year t-1.
CSR_Communityt-1
An indicator variable equal to one if the total number of strengths is greater the
total number of concerns in the community dimension of CSR in year t-1.
CSR_Employee Relationt-1 An indicator variable equal to one if the total number of strengths is greater the
total number of concerns in the employee relation dimension of CSR in year t-1.
CSR_Diversityt-1
An indicator variable equal to one if the total number of strengths is greater the
total number of concerns in the diversity dimension of CSR in year t-1.
CSR_Productt-1
An indicator variable equal to one if the total number of strengths is greater the
total number of concerns in the product dimension of CSR in year t-1.
Dependent Variables
Trading Profitt (%)
The average daily abnormal return, stated in percentage terms, over the 180 days
following each trade in year t. Computed as the intercept of the Fama-French
four factor model (market return, book-to-market, size, and momentum) for
purchases and negative of the intercept for sales.
Purchaset
An indicator variable equal to one if any executive of the firm purchased shares
in an open-market transaction during year t and total shares purchased by
executives are greater than or equal to total shares sold by executives, zero
otherwise.
Control Variables
BTMt-1
Book-to-market ratio (book value of equity over market value of equity) at the
end of year t-1.
LogMVt-1
Natural logarithm of market value of equity at the end of the year t-1.
R&Dt-1
An indicator variable equal to one if a firm has positive R&D expenses in year t1, and zero otherwise.
Losst-1
An indicator variable equal to one if a firm reports negative earnings before
extraordinary items for year t-1, and zero otherwise.
Volatilityt-1
Variance of daily stock returns over the interval (-380, -20) before the trade.
LogAnalystt-1
Natural logarithm of one plus the number of analysts following the firm in year t1.
Turnovert-1
The logarithm of trading volume over the (-380, -20) interval before the trade
over shares outstanding.
Restrictt-1
An indicator variable set to one if 75% or more of trades during year t-1 occur
in a 30-day window following an earnings announcement, and zero otherwise.
Free Cash Flowt-1
Cash flow from operations minus cash flow used in investing activities during
year t-1, deflated by total assets at the end of year t-1.
Institutional Ownershipt-1 Percentage of institutional holdings at the end of year t-1.
Firm Aget-1
The number of years the firm has been listed on CRSP at the end of year t-1.
Market Sharet-1
The firm’s fraction of sales in its two-digit SIC industry in year t-1.
Weak Govt-1
An indicator variable equal to one for firms with the Gompers et al.’s (2003)
governance index in year t-1 above sample median and zero otherwise.
∆Et+1
The change in earnings from year t to year t+1, deflated by the total assets at the
end of year t.
34
MARett+1(t)
Mediat
Compensationt
The twelve-month buy-and-hold market-adjusted return over year t+1 (t).
The average daily number of news articles in Factiva covering a firm in fiscal
year t.
Natural logarithm of the median total compensation of the top five most highly
paid executives in year t.
35
Table 1: Descriptive statistics
This table reports descriptive statistics of the sample. We merge the U.S. firms covered by MSCI with the
Thomson Financial Insider Filing Data, and obtain open-market transactions of executive officers. CSR
scoret-1 is the total number of strengths minus total number of concerns in the following MSCI’s rating
categories: Environment, Community, Employee Relations, Diversity, Product, and involvement in the
alcohol, gambling, tobacco, firearms, military, and nuclear power controversial industry sectors, measured
in the year prior to the insider trade (i.e., t-1). CSRt-1 is equal to one for firms with a positive CSR score in
year t-1 and zero otherwise. BTMt-1 is book value of equity over market value of equity at the end of year t1. LogMVt-1 is the natural logarithm of market value of equity at the end of year t-1. R&Dt-1 is an indicator
variable equal to one if a firm has positive R&D expenses in year t-1, and zero otherwise. Losst-1 is an
indicator variable equal to one if a firm reports negative earnings before extraordinary items in year t-1, and
zero otherwise. Volatilityt-1 is the variance of daily stock returns over the interval (-380, -20) before the
trade. LogAnalystt-1 is the natural logarithm of one plus the number of analysts following the firm in year t1. Turnovert-1 is the logarithm of trading volume over the (-380, -20) interval before the trade over shares
outstanding.Restrictt-1 is an indicator variable set to one if 75% or more of trades during year t-1 occur in a
30-day window following an earnings announcement, and zero otherwise. N=56,966.
CSR scoret-1
CSRt-1
BTMt-1
LogMVt-1
R&Dt-1
Losst-1
Volatilityt-1
LogAnalystt-1
Turnovert-1
Restrictt-1
Mean
Median
Std. Dev.
Q1
Q3
-0.1741
0.2818
0.4304
7.2662
0.4312
0.1580
0.0010
2.2391
0.6343
0.2570
0
0
0.3652
7.0345
0
0
0.0007
2.3026
0.6687
0
2.0320
0.4499
0.3382
1.4701
0.4952
0.3647
0.0010
0.8315
0.8069
0.4370
-1
0
0.2175
6.1934
0
0
0.0004
1.7918
0.1086
0
1
1
0.5686
8.1178
1
0
0.0011
2.8332
1.1971
1
36
Table 2: CSR orientation and executives’ insider trading profit
This table reports analyses of trade-specific profits over the 180 days following executives’ insider trades.
The trading profits are estimated using the following transaction specific regression of daily returns on four
common factors over the 180 days after each transaction:
Ri – R = α + β1(Rmkt – Rf) + β2 SMB + β3 HML + β4 UMD + ε
Ri is the daily return of firm i’s equity. Rf is the daily risk-free interest rate. Rmkt is the CRSP value-weighted
market return. SMB, HML, and UMD are the size, book-to-market, and momentum factors. Trading profits
are equal to α (-α) for purchases (sales).
Panel A: Univariate analysis
This panel reports mean and median average daily trading profits of CSR conscious firms vs. non-CSR
conscious firms over the 180, 120, and 90 days following the trades. Trading profits of purchases and sales
are separately presented in percentage terms. t-tests (Wilcoxon tests) are used to test differences in means
(medians). The trading profits numbers in bold are statistically significant at the 10% level.
Purchases
Sales
N
Mean
(%)
Median
(%)
N
Mean
(%)
Median
(%)
CSR conscious firms
Profit (t + 180)
Profit (t + 120)
Profit (t + 90)
2930
2930
2930
0.0402
0.0600
0.0619
0.0374
0.0573
0.0535
13121
13121
13121
-0.0150
-0.0148
-0.0111
-0.0142
-0.0140
-0.0088
Non-CSR conscious firms
Profit (t + 180)
Profit (t + 120)
Profit (t + 90)
8039
8039
8039
0.0568
0.0810
0.0919
0.0536
0.0733
0.0854
32876
32876
32876
-0.0121
-0.0062
-0.0057
-0.0120
-0.0102
-0.0116
Difference
Profit (t + 180)
Profit (t + 120)
Profit (t + 90)
-0.0166
-0.0210
-0.0300
-0.0162
-0.0160
-0.0319
-0.0029
-0.0085
-0.0054
-0.0022
-0.0039
0.0028
37
Panel B. Regression analysis
This table reports the estimation results of the following regression:
Trading Profitt = α + β1 CSRt-1 + β2 BTMt-1 + β3 LogMVt-1 + β4 R&Dt-1 + β5 Losst-1 + β6 Volatilityt-1 + β7
LogAnalystt-1 + β8 Turnovert-1 + β9 Restrictt-1 + εt
Trading Profitt is the estimated average daily abnormal return over the 180 days following the trade in year
t, stated in percentage terms. CSRt-1 is equal to one for firms with a positive CSR score in year t-1 and zero
otherwise. BTMt-1 is book value of equity over market value of equity at the end of year t-1. LogMVt-1 is the
natural logarithm of market value of equity at the end of year t-1. R&Dt-1 is an indicator variable equal to
one if a firm has positive R&D expenses in year t-1, and zero otherwise. Losst-1 is an indicator variable
equal to one if a firm reports negative earnings before extraordinary items in year t-1, and zero otherwise.
Volatilityt-1 is the variance of daily stock returns over the interval (-380, -20) before the trade. LogAnalystt-1
is the natural logarithm of one plus the number of analysts following the firm in year t-1. Turnovert-1 is the
logarithm of trading volume over the (-380, -20) interval before the trade over shares outstanding. Restrictt1 is an indicator variable set to one if 75% or more of trades during year t-1 occur in a 30-day window
following an earnings announcement, and zero otherwise. The regressions are estimated for purchases only.
Standard errors are robust standard errors clustered by person.
Intercept
CSRt-1
BTMt-1
LogMVt-1
R&Dt-1
Losst-1
Volatilityt-1
LogAnalystt-1
Turnovert-1
Restrictt-1
N
R2 (%)
Profit (t + 180)
Estimate
p-value
Profit (t + 120)
Estimate
p-value
Profit (t + 90)
Estimate
p-value
0.0247
-0.0181
0.0075
0.0028
0.0119
0.0003
12.5325
-0.0027
-0.0074
0.0010
0.0333
-0.0233
0.0012
0.0027
0.0114
0.0113
20.2777
0.0008
-0.0094
0.0091
0.0368
-0.0348
-0.0146
0.0030
0.0186
0.0186
30.4488
0.0054
-0.0135
-0.0070
0.2346
0.0074
0.3544
0.3362
0.1069
0.9718
<.0001
0.5807
0.1204
0.8819
10969
0.84
0.2020
0.0111
0.9160
0.4926
0.2739
0.3698
<.0001
0.9051
0.171
0.3154
10969
1.08
0.2622
0.0028
0.2871
0.5459
0.1455
0.2073
<.0001
0.4718
0.0998
0.5098
10969
1.55
38
Table 3: CSR orientation and executives’ insider trading profits
– Dimensions of CSR
This table reports the estimation results of the following regression to estimate the relation between CSR
orientation and executives’ insider trading profits by dimensions of CSR:
Trading Profitt = α + β1 CSR_Environmentt-1 + β2 CSR_Communityt-1 + β3 CSR_Employee Relationst-1 + β4
CSR_Diversityt-1 + β5 CSR_Productt-1 + β6 BTMt-1 + β7 LogMVt-1 + β8 R&Dt-1 + β9 Losst-1 + β10 Volatilityt-1
+ β11 LogAnalystt-1 + β12 Turnovert-1 + β13 Restrictt-1 + εt
Trading Profitt is the estimated average daily abnormal return over the 180 days following the trade, stated
in percentage terms. For CSR_Environmentt-1, CSR_Communityt-1, CSR_Employee Relationst-1,
CSR_Diversityt-1, and CSR_Productt-1, each variable is equal to one for firms with a positive CSR score in
the corresponding CSR dimension (i.e., total number of strengths is greater than total number of concerns
in each CSR dimension) and zero otherwise. LogMVt-1 is the natural logarithm of market value of equity at
the end of year t-1. R&Dt-1 is an indicator variable equal to one if a firm has positive R&D expenses in year
t-1, and zero otherwise. Losst-1 is an indicator variable equal to one if a firm reports negative earnings
before extraordinary items in year t-1, and zero otherwise. Volatilityt-1 is the variance of daily stock returns
over the interval (-380, -20) before the trade. LogAnalystt-1 is the natural logarithm of one plus the number
of analysts following the firm in year t-1. Turnovert-1 is the logarithm of trading volume over the (-380, 20) interval before the trade over shares outstanding. Restrictt-1 is an indicator variable set to one if 75% or
more of trades during year t-1 occur in a 30-day window following an earnings announcement, and zero
otherwise. The regression is estimated for purchases only. Standard errors are robust standard errors
clustered by person.
Intercept
CSR_Environmentt-1
CSR_Communityt-1
CSR_Employee Relationst-1
CSR_Diversityt-1
CSR_Productt-1
BTMt-1
LogMVt-1
R&Dt-1
Losst-1
Volatilityt-1
LogAnalystt-1
Turnovert-1
Restrictt-1
N
R2 (%)
Estimate
p-value
0.0234
-0.0239
-0.0034
0.0009
-0.0045
-0.0162
0.0079
0.0027
0.0140
0.0011
11.8863
-0.0029
-0.0072
0.0012
0.2803
0.0315
0.6927
0.9035
0.5476
0.1933
0.3319
0.3716
0.0624
0.9147
0.0002
0.5581
0.1370
0.8625
10969
0.82
39
Table 4: New CSR initiatives and executives’ insider trading profits
This table reports the estimation results of the following regression to estimate the relation between a firm’s
CSR orientation and executives’ insider trading profits for firms rising from non-CSR conscious to CSR
conscious:
Trading Profitt = α + β1 Post + β2 BTMt-1 + β3 LogMVt-1 + β4 R&Dt-1 + β5 Losst-1 + β6 Volatilityt-1 + β7
LogAnalystt-1 + β8 Turnovert-1 + β9 Restrictt-1 + εt
Trading Profitt is the estimated average daily abnormal return over the 180 days following the trade, stated
in percentage terms. Post is an indicator variable equal to one for executive trades during the first year after
the firm turns CSR conscious, and zero for their trades during the most recent year before that. BTMt-1 is
book value of equity over market value of equity at the end of year t-1. LogMVt-1 is the natural logarithm of
market value of equity at the end of year t-1. R&Dt-1 is an indicator variable equal to one if a firm has
positive R&D eFxpenses in year t-1, and zero otherwise. Losst-1 is an indicator variable equal to one if a
firm reports negative earnings before extraordinary items in year t-1, and zero otherwise. Volatilityt-1 is the
variance of daily stock returns over the interval (-380, -20) before the trade. LogAnalystt-1 is the natural
logarithm of one plus the number of analysts following the firm in year t-1. Turnovert-1 is the logarithm of
trading volume over the (-380, -20) interval before the trade over shares outstanding. Restrictt-1 is an
indicator variable set to one if 75% or more of trades during year t-1 occur in a 30-day window following
an earnings announcement, and zero otherwise. The regression is estimated only for firms that experience a
change in CSR orientation and for insider purchases only. Standard errors are robust standard errors
clustered by person.
Intercept
Post
BTMt-1
LogMVt-1
R&Dt-1
Losst-1
Volatilityt-1
LogAnalystt-1
Turnovert-1
Restrictt-1
N
R2 (%)
Estimate
p-value
0.1702
-0.0553
0.0158
-0.0143
0.0088
-0.0934
16.1670
0.0060
0.0028
-0.0163
0.011
0.0067
0.3932
0.0878
0.6926
<.0001
0.0299
0.5500
0.7458
0.4279
724
6.47
40
Table 5: CSR orientation and new executives’ insider trading profits
This table reports the estimation results of the following regression to estimate the relation between CSR
orientation and insider trading profits of new executives hired from outside the firm:
Trading Profitt = α + β1 CSRt-1 + β2 BTMt-1 + β3 LogMVt-1 + β4 R&Dt-1 + β5 Losst-1 + β6 Volatilityt-1 + β7
LogAnalystt-1 + β8 Turnovert-1 + β9 Restrictt-1 + εt
Trading Profitt is the estimated average daily abnormal return over the 180 days following the trade, stated
in percentage terms. CSRt-1 is equal to one for firms with a positive CSR score in year t-1 and zero
otherwise. BTMt-1 is book value of equity over market value of equity at the end of year t-1. LogMVt-1 is the
natural logarithm of market value of equity at the end of year t-1. R&Dt-1 is an indicator variable equal to
one if a firm has positive R&D expenses in year t-1, and zero otherwise. Losst-1 is an indicator variable
equal to one if a firm reports negative earnings before extraordinary items in year t-1, and zero otherwise.
Volatilityt-1 is the variance of daily stock returns over the interval (-380, -20) before the trade. LogAnalystt-1
is the natural logarithm of one plus the number of analysts following the firm in year t-1. Turnovert-1 is the
logarithm of trading volume over the (-380, -20) interval before the trade over shares outstanding. Restrictt1 is an indicator variable set to one if 75% or more of trades during year t-1 occur in a 30-day window
following an earnings announcement, and zero otherwise. The regression is estimated for purchases by new
executives hired from outside the firm only. We identify these two executives using two alternative
approaches. The first approach (reported in column (1)) relies on the TFN insider filing data. The second
approach (reported in column (2)) relies on the Execucomp data. Standard errors are robust standard errors
clustered by person.
(1)
Intercept
CSRt-1
BTMt-1
LogMVt-1
R&Dt-1
Losst-1
Volatilityt-1
LogAnalystt-1
Turnovert-1
Restrictt-1
N
R2 (%)
(2)
Estimate
p-value
Estimate
p-value
0.0274
-0.0508
0.0115
0.0152
0.0360
-0.0327
19.0939
-0.0351
-0.0165
-0.0322
0.6557
0.0176
0.6841
0.0607
0.1098
0.2791
0.0698
0.0160
0.2643
0.1312
0.1014
-0.0580
-0.0932
0.0110
0.0444
-0.0689
47.0780
-0.0270
-0.0410
-0.0427
0.3616
0.0532
0.0705
0.4137
0.1976
0.1138
0.0043
0.3720
0.0854
0.1527
720
6.16
260
10.62
41
Table 6: CSR orientation and executives’ insider trading profits
– Role of corporate governance
This table examines whether the association between CSR orientation and executives’ insider trading
profits varies with corporate governance as captured by Gompers et al.’s (2003) governance index by
running the following regression for the strong governance (governance index above sample median) and
weak governance (governance index below sample median) groups separately:
Trading Profitt = α + β1 CSRt-1 + β2 BTMt-1 + β3 LogMVt-1 + β4 R&Dt-1 + β5 Losst-1 + β6 Volatilityt-1 + β7
LogAnalystt-1 + β8 Turnovert-1 + β9 Restrictt-1 + εt
Trading Profitt is the estimated average daily abnormal return over the 180 days following the trade, stated
in percentage terms. CSRt-1 is equal to one for firms with a positive CSR score in year t-1 and zero
otherwise. BTMt-1 is book value of equity over market value of equity at the end of year t-1. LogMVt-1 is the
natural logarithm of market value of equity at the end of year t-1. R&Dt-1 is an indicator variable equal to
one if a firm has positive R&D expenses in year t-1, and zero otherwise. Losst-1 is an indicator variable
equal to one if a firm reports negative earnings before extraordinary items in year t-1, and zero otherwise.
Volatilityt-1 is the variance of daily stock returns over the interval (-380, -20) before the trade. LogAnalystt-1
is the natural logarithm of one plus the number of analysts following the firm in year t-1. Turnovert-1 is the
logarithm of trading volume over the (-380, -20) interval before the trade over shares outstanding. Restrictt1 is an indicator variable set to one if 75% or more of trades during year t-1 occur in a 30-day window
following an earnings announcement, and zero otherwise. Standard errors are robust standard errors
clustered by person.
Intercept
CSRt-1
BTMt-1
LogMVt-1
R&Dt-1
Losst-1
Volatilityt-1
LogAnalystt-1
Turnovert-1
Restrictt-1
N
R2 (%)
Weak Governance
Estimate
p-value
Strong Governance
Estimate
p-value
0.0424
-0.0310
0.0103
0.0063
0.0055
0.0238
13.1285
-0.0182
0.0029
-0.0165
0.0139
0.0130
0.0016
0.0032
0.0317
-0.0093
1.6635
-0.0069
-0.0079
0.0038
0.3260
0.0031
0.5118
0.2584
0.6349
0.1792
0.0662
0.0093
0.7410
0.1333
2649
2.17
0.7560
0.3095
0.9400
0.6050
0.0321
0.6624
0.8357
0.5463
0.2958
0.7893
2465
0.86
42
Table 7: CSR orientation and executives’ insider trading profits
– Propensity score matching
This table reports the relation between CSR and executives’ insider trading profits when each CSR
conscious firm-year is matched with a non-CSR conscious control firm-year with the closest propensity
score.
Panel A: Logistic regression to model CSR consciousness
This panel reports the estimation results of the following first stage logistic regression to model CSR
conscious firms:
Prob(CSRt-1=1) = logit( α + β1 BTMt-1 + β2 LogMVt-1 + β3 R&Dt-1 + β4 Losst-1 + β5 Volatilityt-1 + β6
LogAnalystt-1 + β7 Turnovert-1 + β8 Restrictt-1 + β9 Turnovert-1 + β10 Free Cash Flowt-1 + β11 Institutional
Ownershipt-1 + β12 Firm Aget-1 + β13 Market Sharet-1 + εt)
CSRt-1 is equal to one for firms with a positive CSR score in year t-1 and zero otherwise. BTMt-1 is book
value of equity over market value of equity at the end of year t-1. LogMVt-1 is the natural logarithm of
market value of equity at the end of year t-1. R&Dt-1 is an indicator variable equal to one if a firm has
positive R&D expenses in year t-1, and zero otherwise. Losst-1 is an indicator variable equal to one if a firm
reports negative earnings before extraordinary items in year t-1, and zero otherwise. Volatilityt-1 is the
variance of daily stock returns over the interval (-380, -20) before the trade. LogAnalystt-1 is the natural
logarithm of one plus the number of analysts following the firm in year t-1. Turnovert-1 is the logarithm of
trading volume over the (-380, -20) interval before the trade over shares outstanding. Restrictt-1 is an
indicator variable set to one if 75% or more of trades during year t-1 occur in a 30-day window following
an earnings announcement, and zero otherwise. Free Cash Flowt-1 is cash flow from operations minus cash
flow used in investing in year t-1 deflated by total assets at the end of year t-1. Institutional Ownershipt-1 is
the percentage of institutional holdings at the end of year t-1. Firm Aget-1 is the number of years the firm
has been listed on CRSP at the end of year t-1. Market Sharet-1 is the firm’s fraction of sales in its two-digit
SIC industry in year t-1.
Intercept
BTMt-1
LogMVt-1
R&Dt-1
Losst-1
Volatilityt-1
LogAnalystt-1
Turnovert-1
Restrictt-1
Free Cash Flowt-1
Institutional Ownershipt-1
Firm Aget-1
Market Sharet-1
Industry fixed effects
Year fixed effects
N of firm-years
N of CSR=1
Pseudo R2
Estimate
p-value
-5.5809
0.0869
0.2936
0.3161
-0.0088
17.8338
-0.0340
0.1197
-0.0297
-0.1591
0.5114
0.0619
-0.9783
0.9694
0.4364
<.0001
0.0256
0.9373
0.6434
0.5650
0.0811
0.6989
0.5121
0.0080
0.1792
0.3790
Yes
Yes
4273
1240
0.14249
43
Panel B: Propensity score matching results
This panel reports mean and median average daily trading profits (stated in percentage terms) for
executives of CSR conscious firms vs. propensity-matched non-CSR conscious firms over the 180days
following the trades. t-tests (Wilcoxon tests) are used to test differences in means (medians). The trading
profit numbers in bold are statistically significant at the 1% level.
CSR conscious firms
Matched firms
Difference
N
Mean (%)
Median (%)
2492
2639
0.0390
0.0561
-0.0171
0.0370
0.0436
-0.0066
44
Table 8: CSR orientation and executives’ insider trading profits
– Additional control variables
This table reports the estimation results of the following regression:
Trading Profitt = α + β1 CSRt-1 + β2 BTMt-1 + β3 LogMVt-1 + β4 R&Dt-1 + β5 Losst-1 + β6 Volatilityt-1 + β7
LogAnalystt-1 + β8 Turnovert-1 + β9 Restrictt-1 + β10 Additional Control + εt
Trading Profitt is the estimated average daily abnormal return over the 180 days following the trade, stated
in percentage terms. CSRt-1 is equal to one for firms with a positive CSR score in year t-1 and zero
otherwise. BTMt-1 is book value of equity over market value of equity at the end of year t-1. LogMVt-1 is the
natural logarithm of market value of equity at the end of year t-1. R&Dt-1 is an indicator variable equal to
one if a firm has positive R&D expenses in year t-1, and zero otherwise. Losst-1 is an indicator variable
equal to one if a firm reports negative earnings before extraordinary items in year t-1, and zero otherwise.
Volatilityt-1 is the variance of daily stock returns over the interval (-380, -20) before the trade. LogAnalystt-1
is the natural logarithm of one plus the number of analysts following the firm in year t-1. Turnovert-1 is the
logarithm of trading volume over the (-380, -20) interval before the trade over shares outstanding. Restrictt1 is an indicator variable set to one if 75% or more of trades during year t-1 occur in a 30-day window
following an earnings announcement, and zero otherwise. The additional control variable is either Mediat
or Compensationt. Mediat is the average daily number of news articles in Factiva covering a firm in year t.
Compensationt is the natural logarithm of the median total compensation of the top five most highly paid
executives in year t. The regression is estimated for purchases only. Standard errors are robust standard
errors clustered by person.
(1)
Intercept
CSRt-1
BTMt-1
LogMVt-1
R&Dt-1
Losst-1
Volatilityt-1
LogAnalystt-1
Turnovert-1
Restrictt-1
Mediat
Compensationt
N
R2 (%)
(2)
Estimate
p-value
Estimate
p-value
0.0480
-0.0152
0.0026
-0.0030
0.0100
-0.0035
11.6610
-0.0025
-0.0098
-0.0004
0.0047
0.0312
0.0319
0.7636
0.4895
0.1986
0.7439
0.0001
0.6312
0.0643
0.9574
0.2435
0.0173
-0.0142
-0.0068
-0.0059
0.0058
0.0036
11.1499
-0.0124
-0.0085
0.0040
0.6618
0.0576
0.5111
0.1907
0.4809
0.7682
0.0111
0.0217
0.1448
0.6120
0.0152
0.0355
9611
0.82
6427
1.20
45
Table 9: CSR orientation and executives’ insider trading profits
– Lower-level managers
This table reports the estimation results of the following regression for the trades made by lower-level
managers:
Trading Profitt = α + β1 CSRt-1 + β2 BTMt-1 + β3 LogMVt-1 + β4 R&Dt-1 + β5 Losst-1 + β6 Volatilityt-1 + β7
LogAnalystt-1 + β8 Turnovert-1 + β9 Restrictt-1 + εt
Trading Profitt is the estimated average daily abnormal return over the 180 days following the trade, stated
in percentage terms. CSRt-1 is equal to one for firms with a positive CSR score year t and zero otherwise.
BTMt-1 is book value of equity over market value of equity at the end of year t-1. LogMVt-1 is the natural
logarithm of market value of equity at the end of year t-1. R&Dt-1 is an indicator variable equal to one if a
firm has positive R&D expenses in year t-1, and zero otherwise. Losst-1 is an indicator variable equal to one
if a firm reports negative earnings before extraordinary items in year t-1, and zero otherwise. Volatilityt-1 is
the variance of daily stock returns over the interval (-380, -20) before the trade. LogAnalystt-1 is the natural
logarithm of one plus the number of analysts following the firm in year t-1. Turnovert-1 is the logarithm of
trading volume over the (-380, -20) interval before the trade over shares outstanding. Restrictt-1 is an
indicator variable set to one if 75% or more of trades during year t-1 occur in a 30-day window following
an earnings announcement, and zero otherwise. The regression is estimated for purchases only. Standard
errors are robust standard errors clustered by person.
Intercept
CSRt-1
BTMt-1
LogMVt-1
R&Dt-1
Losst-1
Volatilityt-1
LogAnalystt-1
Turnovert-1
Restrictt-1
N
R2 (%)
Estimate
p-value
0.0787
0.0056
0.0138
-0.0043
-0.0015
-0.0159
13.6621
-0.0052
0.0019
-0.0005
0.0002
0.3382
0.0745
0.1372
0.8333
0.1807
<.0001
0.1791
0.6863
0.9331
7085
1.55
46
Table 10: CSR orientation and executives’ likelihood of trading on future news
This table reports the estimation results of the following regression:
Prob(Purchaset=1) = logit(α + β1 Earnt+1+ β2 MARett+1 + β3 BTMt + β4 LogMVt + β5 MARett + β6 R&Dt
+ εt)
Purchaset is an indicator variable equal to one if any executive of the firm purchased shares in an openmarket transaction during year t and total shares purchased by executives are greater than or equal to total
shares sold by executives, zero otherwise. Earnt+1 is the change in earnings from year t to year t+1,
deflated by the total assets at the end of year t. MARett+1 is the buy-and-hold market-adjusted return over
year t+1. BTMt is book value of equity over market value of equity at the end of year t. LogMVt is the
natural logarithm of market value of equity at the end of year t. MARett is the buy-and-hold market-adjusted
return over year t. R&Dt is an indicator variable equal to one if a firm has positive R&D expenses in year t,
and zero otherwise. Standard errors are robust standard errors clustered by firm and year.
Intercept
Earnt+1
MARett+1
BTMt
LogMVt
MARett
R&Dt
N
R2 (%)
Non-CSR conscious firms
Estimate
p-value
CSR-conscious firms
Estimate
p-value
-0.6078
0.6606
0.1163
0.4895
-0.231
-0.4156
-0.1391
-0.9796
0.1308
0.0681
0.6862
-0.1853
-0.3123
-0.1266
0.0017
0.0399
0.0901
<.0001
<.0001
<.0001
0.0398
16371
3.13
0.0004
0.8174
0.5221
<.0001
<.0001
0.0107
0.2307
7411
2.91
47