The Impact of Cost of Capital, Working Capital and Corporate Social Responsibility on Insider Trading: A Mediation Role of Ownership Structure

Abstract

This study empirically investigates the influence of cost of capital, working capital, and CSR on Insider Trading, with a mediating role played by ownership structure. As per the Securities Act, 2015; Insider trading is prohibited in Pakistan. Considering this prohibition, insider trading laws are not effectively enforced because of weak governance mechanisms. Several cases of Insider Trading have been reported in Pakistan, so there was a need to have an insight about the subject. We have made a theoretical contribution to the existing literature on Insider Trading. The data in our study is Panel in nature, which we have collected from the period of 2018-2022, and the top 100 Non-Financial Listed companies of PSX. Thomson Reuters DataStream and Firms Annual Reports are used for data collection. Statistical tests (correlation, regression, and mediation analysis) were used for the analysis of the collected data with the help of Stata software. As per the findings, OLS showed significant results in terms of cost of debt, cost of equity, cash, and Corporate Social Responsibility on Insider Trading. No significant impact of marketable securities on Insider Trading is observed. Correlation and regression analysis proved a significant positive relationship among cost of capital (independent variables) and insider trading (dependent variable) in non-financial firms in Pakistan. Moreover, correlation and regression analyses have also revealed a significant positive relationship between ownership structure (mediator) and insider trading (dependent variable) in non-financial firms in Pakistan. Finally, mediation analysis has proved a significant mediating effect of ownership structure in the relationship between the cost of debt, cost of equity, cash, CSR (independent variables) and insider trading (dependent variable) in non-financial firms in Pakistan. But ownership structure may not play a significant mediating role in the relationship between marketable securities and insider trading.