Board of Directors Monitoring of CEO Insider Trading: Before and After the Sarbanes-Oxley Act

This study investigates the impact monitoring by the board of directors had on the incidence of insider trading by firm chief executive officers (CEO) and on the abnormal returns they realized from 1996 to 2008. The study also analyzes the impact the Sarbanes-Oxley Act of 2002 (SOX) had on this relationship. The results show that CEOs earned significant abnormal returns on their buy and sell trades during this period. Furthermore, the results show that internal governance mechanisms such as board independence and CEO/Chairman duality reduce abnormal return and the intensity of CEOs' insider trades. The results are particularly significant for trades with more significant underlying nonpublic information. The results also show that SOX significantly reduced the abnormal returns and the intensity of CEOs’ insider trades. The results show that SOX weakened the impact of board independence in mitigating CEOs' insider trades, while it increased the impact of the CEO/chairman duality. The results indicate that internal governance mechanisms generally have more pronounced impact on sell trades than on buy trades.