There has been an ongoing debate on the impact of insidertrading on financial markets. Insiders can easily access inside information and make abnormal profits through this information advantage, consequently decreasing the confidence of investors in financial markets. In contrast to this negative side, insider trading can positively affect financial markets. Since insider trading provides investors with crucial information that is not publicly released about firms’performance or financial policies, insider trading reduces information asymmetry between firms and investors (Ke, Huddart, and Petroni, 2003; Lustgarten and Mande, 1998; Sivakumar and Vijayakumar, 2001; Kim and Choi, 2010; Sohn, Kim, and Goh, 2009). Insider buying (selling) signals that firms are possibly undervalued (overvalued) or may have good (bad) news, suggesting that insider trading benefits financial markets by decreasing information asymmetry. However, this negative relationship between insider trading and information asymmetry is likely to depend on information quality. Because insider trading in firms that disclose transparent information conveys valuable information to financial markets, the positive effect of insider trading on information asymmetry is expected to increase in these firms. In this reasoning, the relationship between insider trading and information asymmetry is likely to depend on the quality of information that firms provide. Meanwhile, a firm’s environmental, social, and governance (ESG) has received a growing attention from both practitioners and academics over the past decade. ESG is regarded as an important factor for firms to improve a good reputation and achieve sustainable survival (Leem, Cheung, and Son, 2019). Existing studies has examined the relationship between ESG and information asymmetry (Cho, Lee, and Pfeiffer, 2013; Kim, Park, and Wier, 2012; Yoon and Lee, 2019). These studies find that information asymmetry between firms and investors tends to decrease in firms with greater EGS because these firms provide markets with trustworthy information, implying that ESG is likely to improve the quality of information that firms disclose. In line with this extant literature, information quality can affect the relationship between insider trading and information asymmetry, but relatively little is known about this research. Thus, we examine how a firm’s ESG affects the relationship between insider trading and information asymmetry. Since the information quality of firms with more ESG is higher than that of firms with less ESG, the positive effect of insider trading on information asymmetry will be pronounced in firms that invest in more ESG. Based on this discussion, we propose the hypothesis that the negative association between insider trading and information asymmetry strengthens in firms with greater ESG. To test our hypothesis, we use data on Korean firms over the 2011-2020 period. Following existing literature (e.g., Lang and Lundholm, 1996; Krishnaswami and Subramaniam, 1999; Drobetz, Grüninger, and Hirschvogl, 2010), we measure information asymmetry using analysts’forecast errors and dispersion. In addition, we measure insider trading as net insider trading, which is the difference between insider buying and selling in a given year. Furthermore, given that our ESG data comprises six ratings, we define firms with A+, A, or B+ of ESG rating as high ESG firms and these with B, C, or D of ESG rating as low ESG firms, respectively. Our final sample includes 3,531 firm-year observations from 2011 to 2020. We find that the negative relationship between insider trading and analysts’ earnings forecast errors and dispersion is stronger in firms that engage in more ESG. Our results suggest that firms’ ESG is likely to improve the transparency and credibility of insider trading’s information, resulting in a greater decrease in information asymmetry. Further, our findings persist after addressing endogeneity issues such as reverse causality and omitted variable bias concerns. Specifically, our results hold when we conduct various robustness tests including regressions with firm fixed effects, change regressions, and System Generalized Method of Moments (GMM) estimations, and alternative measures of analyst forecasts. While previous studies on insider trading have examined a negative relationship between insider trading and information asymmetry, this paper contributes to the corporate finance literature by showing that the association between insider trading and information asymmetry depends on the information quality of insider trading. Moreover, this study adds to the literature on ESG by focusing on how a firm’s ESG affects information asymmetry.
