A Proclivity to Cheat : How Culture Influences Illegal Insider Trading

We examine the role of culture on the prevalence of illegal insider trading. Recent literature suggests that decisions and actions of economic decision-makers, including CEOs and managers, are influenced by behavioural biases (Shefrin, 2007). We hypothesize that nations where individuals are more risk-averse and less individualistic engage in less illegal insider trading. We employ the uncertainty avoidance and individualism cultural dimensions of Hofstede (2001) as a proxy for culture. Using price run ups and abnormal volume data, as a proxy for illegal insider trading, from 7,853 target firms in 28 countries for the period January 1990 to August 2008, we show that uncertainty avoidance, a country-level proxy for risk aversion, is negatively related to insider trading, while individualism appears to have less connection with insider trading. Our findings suggest that law makers may need to consider cultural aspects within a country when developing insider trading laws