Does institutional investors’ monitoring substitute for litigation in curbing insider trading? The case of Malaysia

Abstract

Purpose The ineffectiveness of external governance mechanisms (laws and regulations) designed to curb insider trading in Malaysia leads this study to focus on the role of internal governance of firms in helping to reduce insider trading incidences. The purpose of this paper is to investigate the influence on institutional shareholders on insider trading activity. Design/methodology/approach The study uses data collected from a sample of 115 firms listed on the Bursa Malaysia over a five-year period (from year 2010 to 2014). Ordinary least squares technique is used to achieve the objective of this study. Findings The findings of this study points toward asymmetric information as a motivator for insider trading activity. Unlike previous studies which find the presence of institutional investors helping to reduce insider trading, this study finds results to the contrary. Originality/value This study focuses on the influence of institutional shareholdings on insider trading. The results provide more insight into the effectiveness of the role of institutions in curbing insider trading and suggest a closer monitoring of institutional shareholders.