The authors use changes in corporate governance regulations in the Netherlands in 2004 to examine the relationship between insider-trading profits and the presence and extent of antishareholder mechanisms. They find that insider-trading profits are higher at firms that have fewer antishareholder mechanisms and conclude that insider-trading profits constitute an imperfect substitution for other private benefits of control. Although the authors focus on legal forms of insider trading, other research suggests that insiders may also engage in illegal forms of insider trading.

The authors’ research shows that in the long run, strong corporate governance and the absence of antishareholder mechanisms benefit both the firms that operate under such a structure and the societies that mandate strong corporate governance and shareholder rights. In the aftermath of the 2008 global financial crisis, regulators in many countries underwent a process of analyzing and adjusting various aspects of their regulatory approach, including corporate governance. A better understanding of how incentives work within a particular corporate structure and of how specific regulatory changes seem to affect those incentives can help improve the functioning of corporations and the capitalist societies within which they operate.

The authors use the 2004 changes in Dutch corporate governance regulations as a quasi-natural experiment, taking a difference-in-differences approach to probe the effect on insider-trading profits of the new corporate governance code and strengthened shareholder rights. They look at firms that, because of their structure at the time, appeared to be in conflict with the 2004 corporate governance regulations. Two main hypotheses form the basis for the authors’ research: the monitoring hypothesis and the substitution hypothesis. The monitoring hypothesis posits that strong corporate governance curtails insider-trading profits through increased shareholder awareness and blockholder monitoring. Thus, firms with stronger corporate governance standards and fewer antishareholder mechanisms would show less profitable insider-trading transactions.

The substitution hypothesis suggests that firms with strong corporate governance structures will experience larger profits from insider trading. At firms with weak corporate governance, insiders can focus on more attractive private benefits of control—for example, the use of firm resources for private purposes and higher executive compensation. Faced with strong corporate governance, insiders will substitute less reliable profits from insider trading for other private benefits that are more easily extracted in companies with weak corporate governance.

The data are from the Netherlands Authority for the Financial Markets from April 1999 to 2007. The authors include 15,527 transactions in their dataset and find that the pattern of cumulative abnormal returns supports the substitution hypothesis. The results suggest that fewer antishareholder mechanisms are associated with higher insider-trading profits, which is contrary to what the monitoring hypothesis predicts. The authors also consider several alternative explanations for their results without perceiving any notable impact on the main results of their analysis.

Professionals involved in parsing government regulations and assessing their intended and unintended consequences would find value in considering the results of this research and using it to spur further examination. Given that the Netherlands has a history of especially weak corporate governance and wide variation in shareholder rights among firms, it is not clear how directly applicable these results would be for corporate governance in such countries as the United States or Great Britain.