The Effect of Regulation on the Volume, Timing, and Profitability of Insider Trading

53 Pages Posted: 9 May 2011

See all articles by Inmoo Lee

Inmoo Lee

KAIST College of Business

Michael Lemmon

University of Utah - Department of Finance

Yan Li

Korea University Business School

John M. Sequeira

National University of Singapore (NUS) - NUS Business School

Date Written: March 1, 2011

Abstract

In this paper, we investigate the timing, volume, and profitability of insider trading has changed over time corresponding to changes in the regulatory environment over the period 1986-2008. Consistent with increased regulatory scrutiny, we find that there has been a steady increase over time in the proportion of trades by insiders that occur right after quarterly earnings announcements, and that more and more firms appear to adopt policies to restrict their insider trading. Along with these changes in the timing of insider transactions, we provide evidence that the overall informativeness of insider trading has also decreased over time, and that the profitability of insider trading completely disappears in the post-2002 period following the implementation of SOX. Examining firms with restrictions on insider trading, we find that insiders in these firms continue to take advantage of positive information but are more careful in exploiting negative information. The results suggest that insiders react strategically to changes in the regulatory environment.

Suggested Citation

Lee, Inmoo and Lemmon, Michael and Li, Yan and Sequeira, John M., The Effect of Regulation on the Volume, Timing, and Profitability of Insider Trading (March 1, 2011). KAIST College of Business Working Paper Series No. 2011-002, Available at SSRN: https://ssrn.com/abstract=1824185 or http://dx.doi.org/10.2139/ssrn.1824185

Inmoo Lee (Contact Author)

KAIST College of Business ( email )

85 Hoegiro Dongdaemun-Gu
Seoul 02455
Korea, Republic of (South Korea)

Michael Lemmon

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States

Yan Li

Korea University Business School ( email )

1 Anam-dong 5 ka
Seoul, 136-701
Korea
82-2-3290-2622 (Phone)

John M. Sequeira

National University of Singapore (NUS) - NUS Business School ( email )

1 Business Link
Singapore, 117592
Singapore

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