Why insiders in some firms are more inside than those in others: Cross-sectional determinants and effects of insider purchase profitability

This dissertation uses cross-sectional analyses to examine factors that affect the profitability of insider purchases, such as the precision of insiders' and outsiders' information and corporate restrictions on insider trading. The empirical evidence shows that, despite the litigation risk inherent in exploiting superior inside information, the profitability of insider purchases is positively associated with the precision of insider information and negatively associated with the disclosure quality of insiders' firms. Employing both direct and indirect approaches to infer the corporate restrictions on insider trading, I find that corporate restrictions on insider trading reduce the profitability of insider purchases. These results hold after controlling for the potential endogeneity between insiders' choice of trading profitability level and their decision on disclosure quality and corporate restrictions on insider trading. I further investigate the impact of insider trading on a firm's cost of equity capital and find that the profitability of insider purchases during a fiscal year is positively associated with their firms' cost of equity capital measured at the end of that year. These results improve our understanding about the cross-sectional variation of the profitability of insider trading.