The Deterrent Effect of Insider Trading Enforcement Actions

We analyze whether exposure to an SEC insider trading enforcement action affects how insiders trade. We find that following an insider trading enforcement action at one firm, exposed insiders earn significantly lower abnormal profits from their trades at other firms compared to non-exposed insiders....

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Bibliographic Details
Published in:The Accounting review 2022-05, Vol.97 (3), p.227-247
Main Authors: Davidson, Robert H., Pirinsky, Christo
Format: Article
Language:English
Subjects:
Action
Enforcement
Insider trading
Probability
Profits
Public Company Accounting Reform & Investor Protection Act 2002-US
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Summary:We analyze whether exposure to an SEC insider trading enforcement action affects how insiders trade. We find that following an insider trading enforcement action at one firm, exposed insiders earn significantly lower abnormal profits from their trades at other firms compared to non-exposed insiders. The deterrent effect is stronger when a fellow insider is convicted, and is similarly significant both pre- and post-SOX. Following the enforcement event, exposed insiders do not trade less frequently, but do trade significantly fewer shares per trade. Insiders who have witnessed an enforcement action have a lower probability for future conviction than their unexposed peers. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: G14; G40; K42.
ISSN:0001-4826
1558-7967
DOI:10.2308/TAR-2020-0003