We study whether the effectiveness of corporate governance mechanisms varies depending on the characteristics of the executives subject to these mechanisms, namely their “psychological type,” as proxied by their history of legal infractions. In particular, we examine insider trading, where we can compare the trading behavior of different types of executives in the same firm. We find that “recordholder” executives, that is, those with prior legal infractions, earn significantly higher profits from purchases and sales than nonrecordholder executives. Furthermore, the profitability of both purchases and sales is significantly increasing in the severity of the infraction. Governance mechanisms, such as blackout policies, lower profits of executives with only traffic infractions; however, profits for executives with serious infractions appear insensitive to blackout policies. Insiders with serious infractions are also more likely to trade during blackout periods and before large information events and are more likely to report their trades to the SEC after the filing deadline. Collectively, our evidence suggests that while governance mechanisms can discipline executives with minor offenses, they appear largely ineffective for those with more serious infractions.

We investigate whether hedge funds (HFs) undertake activism in the corporate bond market. Although there is a growing empirical literature investigating HF activism in the equity market, we know little about the role of HF activists in the corporate bond market. The empirical setting is the active enforcement of bondholders' rights during 2003–2007, triggered by issuers' violation of a standard bond covenant requiring timely financial reporting. Using HF holding data of convertible bonds in Form 13F filings, we identify HF interventions. The patterns of HF ownership suggest that HFs actively purchased convertible bonds to increase their ownership before the issuance of default notices. Relative to other interventions, HF interventions are more likely to target companies with higher levels of cash holdings but less likely to target companies with a greater amount of private debt outstanding. Furthermore, we find that HF interventions are associated with elevated bond trading frequency before late filing notifications and issuances of default notices, as well as a wealth transfer from stockholders and non‐intervening bondholders to intervening bondholders. Taken together, the empirical evidence demonstrates that HFs take actions to force the issuance of default notices in response to delay in financial reporting, suggesting that the primary objective of HF activism in this setting is to extract short‐term profit from bond issuers.