Does Confucianism mitigate informed insider trading? Evidence from China

We examine whether Confucianism surrounding corporate headquarters affects informed insider trading. We empirically show that insiders in firms headquartered in regions with higher levels of Confucianism profit more in sales but not in purchases. We further investigate the cross-sectional variations and document that the relationship between Confucianism and insider trading profitability is more negative in firms with higher information asymmetry and poorer corporate governance. Moreover, the relation attenuates when strong regulations against informed insider trading come in. Finally, we explore insiders’ fidelity from Confucianism and show that firms with higher exposure to Confucianism have better information disclosure and ex-ante governance practices, better communication with their investors, and a lower probability of committing misconduct. Overall, our study provides supportive evidence to the notion that Confucianism can teach a set of values that are beneficial in curbing insiders’ self-serving behaviors and encourage managers’ good behaviors