Local Religiosity and Opportunistic Insider Trading

Based on the organizational psychology and social norms theories, we provide empirical evidence on the association between local religiosity and opportunistic insider trading. We find that local religiosity has a negative and statistically significant impact on opportunistic insider trading, which is robust to alternative model specifications, selection bias, change analysis, reverse causality, omitted variable bias, and measurement errors. We also use an advanced machine learning approach and confirm that local religiosity is a significant predictor of opportunistic insider trading. We also find that the negative effect of local religiosity on opportunistic insider trading is weaker in firms with strong internal governance and with high managerial risk aversion, which suggests that local religiosity becomes less important in certain situations. Overall, local religiosity works as a compensatory control mechanism moderating the effect of insiders’ rent extraction and risk-seeking motives on opportunistic insider trading