In today's business world, social responsibility is becoming an area of focus for many corporations. Corporate social responsibility (CSR) can drive companies to engage their local community, become environmentally sustainable, and develop meaningful relationships with internal and external stakeholders. Implementing socially responsible business practices can have a positive impact on society as well as a company's image—and according to School of Management assistant professor of accounting, Ling Lisic, it can also impact insider trading.
In a recent study conducted with Feng Gao at the University of Illinois in Chicago and Ivy Zhang at the University of Minnesota, Lisic examined the association between CSR and insider trading.
"We wanted to see the contrast between these two concepts [CSR and insider trading]," says Lisic. "We hypothesized that if a firm commits to CSR, they are less likely to have their management engaging in insider trading. That is indeed what we found in our study."
Lisic and her colleagues measured a firm's CSR commitment by examining the CSR ratings of approximately 3,000 U.S. firms issued by MSCI between 1991 and 2011. The ratings were determined using surveys, financial statements, articles in the press and academic journals, and government reports. The team obtained insider trading information from the Thomson Financial Insider Filing Data (TFN), focusing on open market trades of common shares by those in top executive positions.
Their study found that executives of CSR conscious firms make significantly lower profits from their trade activities than executives of non-CSR conscious firms. They also discovered that as firms increase CSR consciousness, their executives make lower trading profits.
What might explain this negative relationship between CSR and insider trades?
According to Lisic, a firm that is committed to CSR would likely impose more severe consequences on self-serving behavior. Another proposed explanation is that a firm's commitment to CSR can be a reflection of the executive team's personal commitment to social good. This personal commitment would mean that the executive is unlikely to engage in unethical actions, for example, insider trading.
This research has important implication for the business world and proponents of CSR.
"Insider trades can negatively impact a company and regulators have come up with various rules to limit it," says Lisic. "Our research suggests there is another way to potentially constrain insider trading and potentially other self-serving behavior. Our research has important practical implications for regulators and the business world."
Beyond the positive brand and societal impacts, companies who engage in CSR may also reduce the risk of their executives engaging in illegal trading.
Ling Lei Lisic joined the accounting faculty at George Mason University in August 2008 after receiving her PhD from the University of Connecticut. She also holds master's degrees from University of Rochester and Hong Kong University of Science and Technology, and a bachelor's degree from Shanghai Jiao Tong University. Click here for full bio.