Policy risk and insider trading

Prior research has examined the influence of political geography on finance through an analysis of local policy risk and has shown that investors recognize and factor it into their pricing decisions. We contribute to this literature by examining whether managers recognize and respond to local policy risk. We use managerial insider trading as a test environment and show that managers respond to this risk by actively trying to reduce their exposure to it. We find that managers abnormally increase their insider sales when local policy risk is high. The effect of local policy risk on insider trading increases after the presidential elections if the firm's state becomes more politically aligned with the President as a result. The effect is weaker for firms with PAC contributions or firms located closer to state capitals with potentially stronger political connections.