هنجارهای اخلاقی تجارت داخلی CFO

Insider trading encompasses the buying or selling of stocks based on non-public information about the securities in question. Engaging in insider trading is particularly unethical for a Chief Financial Officer (CFO) who holds a fiduciary responsibility to shareholders and also typically is ethically obligated by his or her professional responsibilities. Although the Securities and Exchange Commission (1934) has expressly forbidden insider trading, the business press suggests insider trading continues. An application of Cooter’s [Cooter, R., 1997. Normative failure theory of law. Cornell Law Review 82 (5), 947–979; Cooter, R., 2000. Three effects of social norms on law: Expression, deterrence and internalization. Oregon Law Review 79 (1), 1–22] theory of the law and norms suggests that one explanation for the continuation of insider trading is that although illegal, norms may fail to consider insider trader to be unethical. Nevertheless, our knowledge of the norms regarding insider trading is limited. To address this gap, we examine the ethical norms regarding CFOs’ insider trading, and consider the extent to which contextual variables are associated with ethical perceptions of CFO insider trading. We find that insider trading by CFOs is generally perceived to be unethical but not by all participants, nor all ethical measures. Moral equity is particularly informative for understanding the ethicality of CFO insider trading. When relying on the multidimensional ethics scale (MES) measure of moral equity, our results reveal that contextual factors, including trading method used (stock options or share equity) and the direction of earnings surprise (favorable or unfavorable) are significant. We also found that participants that possessed more work experience or financial expertise had a greater tendency to consider CFO insider trading to be unethical than those with less work experience or financial expertise, which suggests the importance of training and education of the general public. In addition, our findings suggest that tougher sanctions will encourage compliance with existing insider trading laws. Implications of our findings for public policy are discussed.

Levitt (1998, p. 3), in his role as Chairman of the Securities and Exchange Committee (SEC), commented on the importance of prohibiting insider trading: Trading based on privileged access to information can demoralize investors and destabilize investment. It has utterly no place in any fair-minded, law-abiding economy. It’s a chronic danger. It’s all too evident in today’s marketplace. …. The American people see it, bluntly, as a form of cheating. They – along with the S.E.C. – have zero tolerance for the crime of insider trading. Insider trading encompasses the buying or selling of stocks based on non-public information about the securities in question. Corporate insider trading based on privileged information is a violation of the Securities Act of 1934 (Meulbroek, 1992, p. 1664). Nevertheless, the popular press (Zuckerman and Anand, 2007, Scannell, 2007 and Searcey et al., 2007) as well as academic research provides evidence of the continuation of insider trading even by those who hold fiduciary and professional responsibilities, including Chief Financial Officers (CFOs) (Huddart et al., 2007, Lustgarten and Mande, 1995 and Park and Park, 2004). To the extent that insider trading can “demoralize investors and destabilize investment” (Levitt, 1998, p. 3), the evidence of continued insider trading is troubling and suggests additional steps may be needed to curb insider trading. Policy makers’ interest in insider trading is stimulated, in part, because decisions about whether and how to regulate insider trading are central to the welfare of the economy at large (Salbu, 1995, p. 314). Legal scholars (Cooter, 2000, Robinson, 2000 and Stout, 2006) recognize the interplay between norms and the law in curbing undesirable behavior. According to the theory of norms and the law (Cooter, 2000, p. 20), violations of laws (such as insider trading) are more than legal and economic decisions but also involve social and ethical considerations. In this regard, Statman (2004, p. 34) states that “rules of fairness in the financial markets are an outcome of a process that involves the entire community.” While various definitions exist, norms are generally considered to reflect beliefs or standards that are understood by members of a group or society that guide and/or constrain individual behavior (Cialdini and Trost, 1998, p. 152).1 Using correspondent inference theory (Jones and McGillis, 1976, pp. 390–398), norms play a role in the extent to which members of society are expected to make correspondent inferences about an individual who engages in an illegal behavior, which, in turn, will direct the social sanctions. Thus, norms are viewed as important for two reasons. First, norms are likely to influence the formation and effectiveness of the law, and consequently, the probability of detection and criminal penalty, if convicted (Cooter, 2000, p. 20). For example, norms influence the extent to which society members are expected to inform authorities if they learn about illegal behavior. Second, in the absence of detection by legal authorities, norms influence the extent to which individuals engaging in illegal behavior suffer social sanctions such as a loss in reputation and opportunities (Ellickson, 1991 and Cooter, 1997). Within the theory of norms and the law (Cooter, 2000, pp. 21–22), norms about the extent to which insider trading is perceived as unethical are expected to play a central role, in part, because they direct and guide views about legal and non-legal sanctions. While an individual’s perceptions reflect one’s own self-based beliefs and standards, collectively, individuals’ perceptions form ethical norms, which are the basis of the social consensus for various behaviors (Jones, 1991 and Mackenzie, 2004). Accordingly, our study examines the ethical norms regarding CFOs’ insider trading, and considers the extent to which contextual factors may be associated with these norms. Our study focuses on the insider trading of a CFO for a publicly traded company. CFOs of publicly traded companies have access to private information about their companies. By virtue of being a member of the executive group of a public company, CFOs have fiduciary and professional responsibilities to a broad range of stakeholders, which have been codified in law (Johnson, 2007, p. 147). According to the Securities Act of 1934, it is illegal for CFOs, like other insiders, to trade based on their inside knowledge (Anonymous, 1997 and Blackman, 1998). An experiment was used to examine the ethical perceptions of CFOs’ insider trading and consider the extent to which contextual variables are associated with ethical perceptions of CFO insider trading. To capture the ethical norms of the broader investment community, participants were working professionals (evening MBA students). Although insider trading by CFOs is generally perceived to be unethical, a surprising percentage of our participants perceived insider trading not to be unethical. We find that insider trading by CFOs generally is perceived to be unethical but not by all participants, nor all ethical measures. Moral equity is particularly informative for understanding the ethicality of CFO insider trading. When relying on the multidimensional ethics scale (MES) measure of moral equity, our results reveal that contextual factors, including trading method used (options or equity) and direction of earnings surprise (favorable or unfavorable) are significant. We also find participants that possessed more work experience and financial statement expertise had a greater tendency to consider CFO insider trading to be unethical, which suggests that continued education and training may contribute toward strengthening the social intolerance toward CFO insider trading. Our paper contributes to the literature by applying the theory of norms and the law to the domain of insider trading and extending the theory of norms and the law by focusing on ethical norms. We further extend this literature by examining the extent to which accounting related variables may influence ethical norms held by individuals. This paper is organized as follows. The next section considers the legislation and incidence of insider trading and presents the theory of norms and the law (Cooter, 2000, pp. 1–3) to explain the continued incidence of insider trading today. This is followed by a presentation of the research method and design, followed by the results, and a discussion of the implications of the findings.

The purpose of our study was to provide evidence on individuals’ ethical norms regarding CFOs’ insider trading. Specifically, this study examined the extent to which contextual variables influence individuals’ ethical norms, and the extent to which ethical norms influence sanction judgments. Multiple measures of ethical perceptions were included in the study to proxy for individuals’ ethical norms. Understanding ethical norms are important because they represent and inform rules of behavior enforced within a community (Giddens, 1984 and Statman, 2004). This notion that the norms of a community play a vital role in compliance is consistent with Cooter’s (2000, p. 20) theory of norms and the law. This theory holds that compliance will be enhanced by aligning laws with norms. Thus, our research extends Cooter’s theory into the domain of ethical norms, and in so doing, provides insights into factors associated with, and perceptions of, CFO insider trading. Under the Securities Act of 1934, insider trading based on material privileged information is illegal, and a top manager engaging in insider trading may receive civil and/or criminal penalties. Penalties for insider trading contained in the 1934 law were subsequently increased by both the Insider Trading Sanctions Act of 1984 and the Insider Trading and Securities Enforcement Act of 1988 (Meulbroek, 1992, pp. 1664–1665). Under current law, civil penalties may be up to three times the amount of the insider’s benefit (e.g., profit gained or loss avoided) and jail terms may be as long as 10 years. Thus, the law is clear that engaging in insider trading based on material privileged information is wrong and the penalties can be harsh. Policy makers have also made indicated that these laws are important for maintaining investors’ confidence in our capital markets. Under the theory of norms and the law (Cooter, 2000, p. 20), insider trading laws will function better when they align with norms. Our study provides evidence on this alignment and factors contributing to the extent of alignment. We find that while participants generally assess insider trading by a CFO to be unethical, this was not a universal view by all participants. For each ethical perception measure, a minority of participants do not perceive CFO insider trading as unethical. Our evidence that a majority of participants assess insider trading to be unethical is consistent with the scholarly research, which generally indicates that the majority of scholars consider insider trading to be unethical and that a minority of scholars do not. This finding should be informative to policy makers because it shows that ethical norms among participants do not appear to fully align with insider trading laws. To the extent that policy makers support current insider trading laws, our results suggest that they may want to take steps to foster ethical norms likely to curb insider trading. In considering potential steps, our results may be used to suggest directing efforts primarily towards individuals who are relatively uninformed about financial statements and investing. These efforts might take the form of education, training, or simply public service announcements or web-based communications. This suggestion is based on our finding that ethical norms among individuals more knowledgeable of financial statements (and presumably more knowledgeable investors) appear to align with the law better than individuals less knowledgeable of financial statements. Our findings also indicate that perceptions of ethicality vary according to context and are consistent with Jones’s (1991, p. 371) issue contingent model of ethical decision making. However, our results demonstrate that the sensitivity of individuals’ ethical perceptions to contextual variables depends, in part, on the measure used. For example, the influence of contextual variables on individuals’ ethics perceptions was most apparent using the moral equity measure. In this regard, our results show that trading method (options or equity) and direction of earnings surprise (favorable or unfavorable) is each associated with perceptions of moral equity. These findings provide further support for using the MES as opposed to only using a global ethics measure in ethics research when perceptions of ethicality are expected to vary across contexts. Had only a global measure of ethics been used in the current study, we would have been less informed about the influence of the two contextual variables including in this study. This finding might be used to suggest that public policy efforts (e.g., education, training, public service announcements, etc.) intended to better align ethical norms among individuals with insider trading laws should focus moral equity considerations. Lastly, our results demonstrate that ethical norms play an important role in guiding sanction judgments. This evidence is important because it suggests that individuals generally do not compartmentalize ethical assessments formed about CFO insider trading. This evidence suggests that ethical norms are an important component in the social sanctions likely to be imposed by individuals as well the legal sanctions individuals will support for insider trading. This finding further supports the need for policy makers to be informed about individuals’ ethical norms and steps that might be taken to foster ethical norms likely to curb insider trading. Given the paucity of research on ethical norms about insider trading, we encourage further research. For example, future research could consider other contextual and individual variables in the association between perceptions and sanctions. Such research might consider whether ethical perceptions of the appropriateness of sanctions vary according to the insider’s professional and fiduciary responsibilities. Several limitations should be noted regarding the study. As part of the experimental approach, participants responded to a hypothetical scenario about insider trading by the CFO of a public company. This approach is becoming increasingly common within financial accounting research (Libby et al., 2002, p. 800) and previously has been used to examine ethical beliefs about insider trading by Statman (2005, p. 78). An experiment is particularly well suited to the current focus because it allows us to directly measure ethical perceptions and sanction judgments. However, use of an experimental approach generally limits the information available to participants. For example, our study did not provide information on the size of the insider trade, historical and current stock prices, etc. These additional pieces of information may influence ethical perceptions and sanction judgments. Additionally, our study only examined insider trading by a CFO. Insider trading can be conducted by a variety of individuals and ethical perceptions and sanction judgments may differ for different perpetuators. We used MBA students as our participants to capture the ethical norms and sanction judgments of the general business community. While we believe that the perceptions of this group are important and are likely to be generally representative of nonprofessional investors (Elliott et al., 2007, pp. 155–156), they may not reflect the perceptions of other groups such as professional investors, financial analysts, creditors, top managers, or judges. Given that our results suggest the importance of expertise and work experience to several of ethical norm measures, further research using participants with different levels of expertise and work experience is encouraged.