Thu Nov 10

How married CEOs are less prone to risky investing and insider trading

Written by Prasad Hegde, Lecturer in Finance, Auckland University of Technology

They say marriage teaches patience and understanding, but might it also be good for business ethics?

Apparently, yes. As our recent study found ^[1], a chief executive’s home life can be a good indicator of whether or not they’ll engage in opportunistic insider trading. Married CEOs seem to take fewer risks with their investment decisions and are less likely to bend the rules than their unmarried counterparts.

Insider trading can be legal or illegal, depending on whether the trades are based on public or non-public company information. But profiting from insider trading can invite serious litigation if outside investors suspect executives have taken advantage of inside knowledge.

Understandably, then, there is a lot of interest in how executives’ personal characteristics and experiences might affect their management style.

Earlier research has documented ^[2] how the marital status of CEOs relates to various aspects of their jobs, such as encouraging corporate social responsibility, the quality of financial reporting, and portfolio investment strategies.

However, these activities and outcomes may not be entirely driven by CEO decisions alone. In our study, we focused on identifying CEOs’ trading activity in their own companies’ shares.

Invested in their own business

Corporate executives can invest a significant proportion of their personal wealth in their companies, and may be remunerated in company stocks on top of their own salaries.

Although CEO stock ownership has decreased over time in the US, on average, CEOs still hold 12% of company shares. This means managers sometimes have to trade stocks in their own firms, for a variety of reasons.

But despite regulations designed to discourage insider trading, it is still hard for regulators and other investors to interpret those reasons: are the trades motivated by a legitimate need for liquidity or diversification, or are they informed by non-public information about the stock?

At the same time, the legal ambiguity and uncertainty about what constitutes an illegal trade also affects the decisions of would-be insider traders. Even when insider trading is technically legal, it still carries a threat of litigation from the US Securities and Exchange Commission (SEC).

The trading floor of the New York Stock Exchange: trading on inside information disadvantages other investors. Getty Images

Marriage and insider trading

Our study provides new insights into whether the marital status of a CEO has any bearing on their behaviour when trading company stock.

Looking at the trading behaviour of 1,100 heads of publicly listed companies in the US between 1996 and 2019, we found marital status seemed to have a significant influence on insider trading patterns. Overall, we found that:

married CEOs earned significantly lower insider trading profits than their unmarried counterparts
married CEOs were less likely to engage in opportunistic trades (as opposed to routine trades) than unmarried CEOs
unmarried CEOs earned higher insider trading profit when they worked for firms with poorer corporate governance mechanisms or information quality.

One possible explanation for this is that married CEOs are simply more likely to avoid insider trading because they don’t want to risk their jobs and let down their families by being prosecuted.

In other words, our findings suggest a CEO’s commitment to married life correlates with a lower appetite for risk.

Marriage as regulator

Insider trading can clearly be a path to increased personal wealth for CEOs because they can convert their equity shares into cash.

Research shows ^[6] insider traders can earn, on average, a 10% higher return compared to an average investor in a stock market index.

CEOs who use inside information for personal gain obviously create an uneven playing field that disadvantages other investors and stakeholders. So it’s useful to be able to identify characteristics that might predict an increased propensity for opportunistic behaviour.

If married CEOs display less opportunistic behaviour than unmarried CEOs, it suggests the social institution of marriage plays a positive – if under-examined – role in regulating trading behaviour at both an individual and corporate level.

Only one indicator

While our study suggests a causal connection between CEO marital status and insider trading, it is not the sole indicator of likely behaviour.

Marriage merely helps determine an executive’s potential appetite for taking risks. In this context, it can be viewed as one of the traits (similar to education level or personality type) that correlates to such behaviours.

Our findings should not be interpreted as a prescription for corporate hiring policies. Risk-taking behaviour can also fuel innovation, drive momentum and help enhance company performance.

However, our study does provide evidence that marital and family commitment can be a good indicator of a CEO’s risk preferences – specifically as it applies to opportunistic insider trading and the subsequent risk of litigation.